Companies: 10,652     total market cap: $140.555 T
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Western Alliance Bancorporation
WAL
#1974
Rank
$10.41 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$94.63
Share price
1.53%
Change (1 day)
3.97%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Western Alliance Bancorporation
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q2

Western Alliance Bancorporation - 10-Q quarterly report FY2020 Q2


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
FORM 10-Q
 
(Mark One)
 
 
 
☒
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020
or
☐
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from__________ to __________

Commission file number: 001-32550  
 
 
WESTERN ALLIANCE BANCORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
88-0365922
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
One E. Washington Street, Suite 1400
Phoenix
Arizona
 
85004
(Address of principal executive offices)
 
(Zip Code)
(602) 389-3500
(Registrant’s telephone number, including area code)
 
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.0001 Par Value
 
WAL
 
New York Stock Exchange
6.25% Subordinated Debentures due 2056
 
WALA
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
☒
 
Accelerated filer
 
☐
 
 
 
 
 
 
 
Non accelerated filer
 
☐
 
Smaller reporting company
 
☐
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of July 27, 2020, Western Alliance Bancorporation had 100,836,148 shares of common stock outstanding.


INDEX
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
Glossary of Entities and Terms
3
 
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
4
 
Consolidated Income Statements
5
 
Consolidated Statements of Comprehensive Income
7
 
Consolidated Statements of Stockholders’ Equity
8
 
Consolidated Statements of Cash Flows
9
 
Notes to Unaudited Consolidated Financial Statements
11
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
69
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
100
Item 4.
Controls and Procedures
103
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
103
Item 1A.
Risk Factors
104
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
105
Item 5.
Other Information
105
Item 6.
Exhibits
107
 
 
 
SIGNATURES
108
 
 



2

PART I
GLOSSARY OF ENTITIES AND TERMS
The acronyms and abbreviations identified below are used in various sections of this Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Item 2 and the Consolidated Financial Statements and the Notes to Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q.
ENTITIES / DIVISIONS:
ABA
Alliance Bank of Arizona
HOA Services
Homeowner Associations Services
BON
Bank of Nevada
LVSP
Las Vegas Sunset Properties
Bridge
Bridge Bank
TPB
Torrey Pines Bank
Company
Western Alliance Bancorporation and subsidiaries
WA PWI
Western Alliance Public Welfare Investments, LLC
CSI
CS Insurance Company
WAB or Bank
Western Alliance Bank
FIB
First Independent Bank
WABT
Western Alliance Business Trust
HFF
Hotel Franchise Finance
WAL or Parent
Western Alliance Bancorporation
TERMS:
AFS
Available-for-Sale
HFI
Held for Investment
ALCO
Asset and Liability Management Committee
HTM
Held-to-Maturity
AOCI
Accumulated Other Comprehensive Income
ICS
Insured Cash Sweep Service
APIC
Additional paid in capital
IRC
Internal Revenue Code
ASC
Accounting Standards Codification
ISDA
International Swaps and Derivatives Association
ASU
Accounting Standards Update
LGD
Loss Given Default
Basel III
Banking Supervision's December 2010 final capital framework
LIBOR
London Interbank Offered Rate
BOD
Board of Directors
LIHTC
Low-Income Housing Tax Credit
BSA
Bank Secrecy Act
MBS
Mortgage-Backed Securities
CARES Act
Coronavirus Aid, Relief and Economic Security Act
MSLP
Main Street Lending Program
CDARS
Certificate Deposit Account Registry Service
NBL
National Business Lines
CDO
Collateralized Debt Obligation
NOL
Net Operating Loss
CECL
Current Expected Credit Losses
NPV
Net Present Value
CEO
Chief Executive Officer
OCI
Other Comprehensive Income
CFO
Chief Financial Officer
OREO
Other Real Estate Owned
COVID-19
Coronavirus Disease 2019
OTTI
Other-than-Temporary Impairment
CRA
Community Reinvestment Act
PCI
Purchased Credit Impaired
CRE
Commercial Real Estate
PD
Probability of Default
EAD
Exposure at Default
PPNR
Pre-Provision Net Revenue
EPS
Earnings per share
PPP
Paycheck Protection Program
EVE
Economic Value of Equity
PPPFA
Paycheck Protection Program Flexibility Act
Exchange Act
Securities Exchange Act of 1934, as amended
REIT
Real Estate Investment Trust
FASB
Financial Accounting Standards Board
ROU
Right of use
FDIC
Federal Deposit Insurance Corporation
SBA
Small Business Administration
FHLB
Federal Home Loan Bank
SBIC
Small Business Investment Company
FHLMC
Federal Home Loan Mortgage Corporation
SEC
Securities and Exchange Commission
FinCEN
Financial Crimes Enforcement Network
SERP
Supplemental Executive Retirement Plan
FNMA
Federal National Mortgage Association
SOFR
Secured Overnight Financing Rate
FOMC
Federal Open Market Committee
SR
Supervision and Regulation Letters
FRB
Federal Reserve Bank
TDR
Troubled Debt Restructuring
FVO
Fair Value Option
TEB
Tax Equivalent Basis
GAAP
U.S. Generally Accepted Accounting Principles
TSR
Total Shareholder Return
GNMA
Government National Mortgage Association
XBRL
eXtensible Business Reporting Language
GSE
Government-Sponsored Enterprise
 
 

3

Item 1.
Financial Statements
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
June 30, 2020
 
December 31, 2019
 
 
(Unaudited)
 
 
 
 
(in thousands,
except shares and per share amounts)
Assets:
 
 
 
 
Cash and due from banks
 
$
189,888

 
$
185,977

Interest-bearing deposits in other financial institutions
 
1,328,575

 
248,619

Cash, cash equivalents, and restricted cash
 
1,518,463

 
434,596

Investment securities - AFS, at fair value; amortized cost of $3,428,395 at June 30, 2020 and $3,317,928 at December 31, 2019
 
3,516,922

 
3,346,310

Investment securities - HTM, at amortized cost; fair value of $521,866 at June 30, 2020 and $516,261 at December 31, 2019
 
479,380

 
485,107

Less: allowance for credit losses
 
(7,649
)
 
—

Net HTM investment securities
 
471,731

 
485,107

Investment securities - equity
 
138,409

 
138,701

Investments in restricted stock, at cost
 
66,661

 
66,509

Loans - HFS
 
20,213

 
21,803

Loans, net of deferred loan fees and costs
 
25,009,215

 
21,101,493

Less: allowance for credit losses
 
(310,550
)
 
(167,797
)
Net loans held for investment
 
24,698,665

 
20,933,696

Premises and equipment, net
 
127,818

 
125,838

Operating lease right of use asset
 
70,332

 
72,558

Bank owned life insurance
 
174,863

 
174,046

Goodwill and intangible assets, net
 
296,860

 
297,608

Deferred tax assets, net
 
34,072

 
18,025

Investments in LIHTC and renewable energy
 
438,114

 
409,365

Other assets
 
333,273

 
297,786

Total assets
 
$
31,906,396

 
$
26,821,948

Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Non-interest-bearing demand
 
$
12,235,975

 
$
8,537,905

Interest-bearing
 
15,308,611

 
14,258,588

Total deposits
 
27,544,586

 
22,796,493

Customer repurchase agreements
 
25,436

 
16,675

Other borrowings
 
10,000

 
—

Qualifying debt
 
617,729

 
393,563

Operating lease liability
 
76,904

 
78,112

Other liabilities
 
529,327

 
520,357

Total liabilities
 
28,803,982

 
23,805,200

Commitments and contingencies (Note 11)
 

 

Stockholders’ equity:
 
 
 
 
Common stock - par value $0.0001; 200,000,000 authorized; 103,002,697 shares issued at June 30, 2020 and 104,527,544 at December 31, 2019
 
10

 
10

Treasury stock, at cost (2,154,039 shares at June 30, 2020 and 2,003,873 shares at December 31, 2019)
 
(70,583
)
 
(62,728
)
Additional paid in capital
 
1,376,859

 
1,374,141

Accumulated other comprehensive income
 
73,677

 
25,008

Retained earnings
 
1,722,451

 
1,680,317

Total stockholders’ equity
 
3,102,414

 
3,016,748

Total liabilities and stockholders’ equity
 
$
31,906,396

 
$
26,821,948

See accompanying Notes to Unaudited Consolidated Financial Statements.

4

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
289,576

 
$
270,349

 
$
566,462

 
$
529,167

Investment securities
 
27,155

 
27,823

 
53,455

 
56,001

Dividends
 
1,293

 
1,530

 
2,908

 
3,163

Other
 
214

 
3,146

 
2,629

 
5,685

Total interest income
 
318,238

 
302,848

 
625,454

 
594,016

Interest expense:
 

 

 
 
 
 
Deposits
 
15,005

 
41,888

 
47,521

 
77,676

Other borrowings
 
35

 
33

 
70

 
1,310

Qualifying debt
 
4,712

 
6,008

 
9,961

 
12,113

Other
 
86

 
238

 
482

 
900

Total interest expense
 
19,838

 
48,167

 
58,034

 
91,999

Net interest income
 
298,400

 
254,681

 
567,420

 
502,017

Provision for credit losses
 
92,000

 
6,964

 
143,176

 
11,500

Net interest income after provision for credit losses
 
206,400

 
247,717

 
424,244

 
490,517

Non-interest income:
 

 

 
 
 
 
Income from bank owned life insurance
 
6,670

 
978

 
7,632

 
1,959

Service charges and fees
 
5,130

 
5,821

 
11,534

 
11,233

Income from equity investments
 
1,311

 
868

 
5,077

 
2,877

Card income
 
1,178

 
1,625

 
2,895

 
3,466

Foreign currency income
 
1,159

 
1,148

 
2,487

 
2,243

Lending related income and gains (losses) on sale of loans, net
 
719

 
553

 
1,367

 
804

Gain (loss) on sales of investment securities, net
 
158

 
—

 
230

 
—

Fair value gain (loss) adjustments on assets measured at fair value, net
 
4,432

 
1,572

 
(6,868
)
 
4,406

Other income
 
513

 
1,653

 
2,025

 
2,640

Total non-interest income
 
21,270

 
14,218

 
26,379

 
29,628

Non-interest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
69,634

 
65,794

 
141,698

 
134,350

Legal, professional, and directors' fees
 
10,669

 
11,105

 
21,071

 
18,637

Data processing
 
8,577

 
6,793

 
17,180

 
13,468

Occupancy
 
8,101

 
7,761

 
16,326

 
15,988

Deposit costs
 
3,514

 
7,669

 
10,852

 
13,393

Insurance
 
3,444

 
2,811

 
6,442

 
5,620

Loan and repossessed asset expenses
 
2,047

 
1,460

 
3,509

 
3,466

Marketing
 
869

 
1,057

 
1,773

 
1,798

Business development
 
831

 
1,444

 
3,112

 
3,529

Card expense
 
383

 
710

 
1,126

 
1,344

Intangible amortization
 
374

 
387

 
747

 
774

Net (gain) loss on sales / valuations of repossessed and other assets
 
(6
)
 
(620
)
 
(1,458
)
 
(523
)
Other expense
 
6,362

 
7,878

 
12,902

 
14,283

Total non-interest expense
 
114,799

 
114,249

 
235,280

 
226,127

Income before provision for income taxes
 
112,871

 
147,686

 
215,343

 
294,018

Income tax expense
 
19,599

 
24,750

 
38,107

 
50,286

Net income
 
$
93,272

 
$
122,936

 
$
177,236

 
$
243,732

 
 
 
 
 
 
 
 
 

5

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands, except per share amounts)
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.93

 
$
1.19

 
$
1.76

 
$
2.35

Diluted
 
0.93

 
1.19

 
1.76

 
2.34

Weighted average number of common shares outstanding:
 
 
 
 
 
 
Basic
 
99,792

 
103,019

 
100,560

 
103,523

Diluted
 
99,993

 
103,501

 
100,834

 
103,985

Dividends declared per common share
 
$
0.25

 
$
—

 
$
0.50

 
$
—

See accompanying Notes to Unaudited Consolidated Financial Statements.

6

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands)
Net income
 
$
93,272

 
$
122,936

 
$
177,236

 
$
243,732

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on AFS securities, net of tax effect of $(12,836), $(11,709), $(14,790), $(21,931), respectively
 
39,308

 
35,923

 
45,584

 
67,300

Unrealized (loss) gain on SERP, net of tax effect of $1, $6, $93, $12, respectively
 
(3
)
 
(17
)
 
(293
)
 
(35
)
Unrealized (loss) gain on junior subordinated debt, net of tax effect of $979, $435, $(1,159), $2,369, respectively
 
(3,005
)
 
(1,334
)
 
3,552

 
(7,262
)
Realized (gain) loss on sale of AFS securities included in income, net of tax effect of $38, $0, $56, $0, respectively
 
(120
)
 
—

 
(174
)
 
—

Net other comprehensive income
 
36,180

 
34,572

 
48,669

 
60,003

Comprehensive income
 
$
129,452

 
$
157,508

 
$
225,905

 
$
303,735

See accompanying Notes to Unaudited Consolidated Financial Statements.

7

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
Three Months Ended June 30,
 
Common Stock
 
Additional Paid in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive (Loss) Income
 
Retained Earnings
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
(in thousands)
Balance, March 31, 2019
104,483

 
$
10

 
$
1,390,569

 
$
(60,983
)
 
$
(8,191
)
 
$
1,399,215

 
$
2,720,620

Net income
—

 
—

 
—

 
—

 
—

 
122,936

 
122,936

Restricted stock, performance stock units, and other grants, net
(33
)
 
—

 
7,251

 
—

 
—

 
—

 
7,251

Restricted stock surrendered (1)
(3
)
 
—

 
—

 
(151
)
 
—

 
—

 
(151
)
Stock repurchase
(793
)
 
—

 
(25,783
)
 
—

 
—

 
(8,181
)
 
(33,964
)
Other comprehensive loss, net
—

 
—

 
—

 
—

 
34,572

 
—

 
34,572

Balance, June 30, 2019
103,654

 
$
10

 
$
1,372,037

 
$
(61,134
)
 
$
26,381

 
$
1,513,970

 
$
2,851,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2020
101,153

 
$
10

 
$
1,370,544

 
$
(70,186
)
 
$
37,497

 
$
1,661,768

 
$
2,999,633

Net income
—

 
—

 
—

 
—

 
—

 
93,272

 
93,272

Exercise of stock options
1

 
—

 
27

 
—

 
—

 
—

 
27

Restricted stock, performance stock unit, and other grants, net
3

 
—

 
8,061

 
—

 
—

 
—

 
8,061

Restricted stock surrendered (1)
(11
)
 
—

 
—

 
(397
)
 
—

 
—

 
(397
)
Stock repurchase
(297
)
 
—

 
(1,773
)
 
—

 
—

 
(7,376
)
 
(9,149
)
Dividends paid
—

 
—

 
—

 
—

 
—

 
(25,213
)
 
(25,213
)
Other comprehensive income, net
—

 
—

 
—

 
—

 
36,180

 
—

 
36,180

Balance, June 30, 2020
100,849

 
$
10

 
$
1,376,859

 
$
(70,583
)
 
$
73,677

 
$
1,722,451

 
$
3,102,414

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Common Stock
 
Additional Paid in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive (Loss) Income
 
Retained Earnings
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
(in thousands)
Balance, December 31, 2018
104,949

 
$
10

 
$
1,417,724

 
$
(53,083
)
 
$
(33,622
)
 
$
1,282,705

 
$
2,613,734

Net income
—

 
—

 
—

 
—

 
—

 
243,732

 
243,732

Exercise of stock options
1

 
—

 
36

 
—

 
—

 
—

 
36

Restricted stock, performance stock unit, and other grants, net
614

 
—

 
13,723

 
—

 
—

 
—

 
13,723

Restricted stock surrendered (1)
(176
)
 
—

 
—

 
(8,051
)
 
—

 
—

 
(8,051
)
Stock repurchase
(1,734
)
 
—

 
(59,446
)
 
—

 
—

 
(12,467
)
 
(71,913
)
Other comprehensive loss, net
—

 
—

 
—

 
—

 
60,003

 
—

 
60,003

Balance, June 30, 2019
103,654

 
$
10

 
$
1,372,037

 
$
(61,134
)
 
$
26,381

 
$
1,513,970

 
$
2,851,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
102,524

 
$
10

 
$
1,374,141

 
$
(62,728
)
 
$
25,008

 
$
1,680,317

 
$
3,016,748

Balance, January 1, 2020 (2)
102,524

 
10

 
1,374,141

 
(62,728
)
 
25,008

 
1,655,370

 
2,991,801

Net income
—

 
—

 
—

 
—

 
—

 
177,236

 
177,236

Exercise of stock options
7

 
—

 
97

 
—

 
—

 
—

 
97

Restricted stock, performance stock units, and other grants, net
534

 
—

 
14,955

 
—

 
—

 
—

 
14,955

Restricted stock surrendered (1)
(150
)
 
—

 
—

 
(7,855
)
 
—

 
—

 
(7,855
)
Stock repurchase
(2,066
)
 
—

 
(12,334
)
 
—

 
—

 
(59,335
)
 
(71,669
)
Dividends paid
—

 
—

 
—

 
—

 
—

 
(50,820
)
 
(50,820
)
Other comprehensive income, net
—

 
—

 
—

 
—

 
48,669

 
—

 
48,669

Balance, June 30, 2020
100,849

 
$
10

 
$
1,376,859

 
$
(70,583
)
 
$
73,677

 
$
1,722,451

 
$
3,102,414


(1)
Share amounts represent Treasury Shares, see "Note 1. Summary of Significant Accounting Policies" for further discussion.    
(2)
As adjusted for adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The cumulative effect of adoption of this guidance at January 1, 2020 resulted in a decrease to retained earnings of $24.9 million due to an increase in the allowance for credit losses. See "Note 1. Summary of Significant Accounting Policies for further discussion."
See accompanying Notes to Unaudited Consolidated Financial Statements.

8

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended June 30,
 
 
2020
 
2019
 
 
(in thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
177,236

 
$
243,732

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Provision for credit losses
 
143,176

 
11,500

Depreciation and amortization
 
9,526

 
8,798

Stock-based compensation
 
14,955

 
13,723

Deferred income taxes
 
(23,197
)
 
3,117

Amortization of net premiums for investment securities
 
12,129

 
6,428

Amortization of tax credit investments
 
19,709

 
20,573

Amortization of operating lease right of use asset
 
2,846

 
2,585

Amortization of net deferred loan fees
 
(32,561
)
 
(21,040
)
Income from bank owned life insurance
 
(2,025
)
 
(1,959
)
(Gains) / Losses on:
 
 
 
 
Sales of investment securities
 
(230
)
 
—

Assets measured at fair value, net
 
6,868

 
(4,406
)
Sale of loans
 
—

 
513

BOLI
 
(5,607
)
 
—

Other assets acquired through foreclosure, net
 
(1,472
)
 
(627
)
Valuation adjustments of other repossessed assets, net
 
14

 
99

Sale of premises, equipment, and other assets, net
 
—

 
5

Changes in other assets and liabilities, net
 
(37,965
)
 
47,239

Net cash provided by operating activities
 
$
283,402

 
$
330,280

Cash flows from investing activities:
 
 
 
 
Investment securities - AFS
 
 
 
 
Purchases
 
(895,699
)
 
(123,848
)
Principal pay downs and maturities
 
618,903

 
230,729

Proceeds from sales
 
156,629

 
—

Investment securities - HTM
 
 
 
 
Purchases
 
(49,174
)
 
(56,060
)
Principal pay downs and maturities
 
8,329

 
4,660

Proceeds from sales
 
—

 
10,000

Equity securities carried at fair value
 
 
 
 
Purchases
 
(7,915
)
 
(283
)
Redemption of principal (reinvestment of dividends)
 
4,118

 
4,695

Purchase of investment tax credits
 
(62,535
)
 
(38,607
)
Proceeds from (purchase of) SBIC investments
 
3,065

 
(3,137
)
Purchase of money market investments, net
 
—

 
(137
)
Proceeds from bank owned life insurance, net
 
5,607

 
—

Purchase of restricted stock
 
(152
)
 
(85
)
Net increase in loans
 
(3,826,106
)
 
(1,463,570
)
Purchase of premises, equipment, and other assets, net
 
(19,718
)
 
(9,164
)
Proceeds from sale of other real estate owned and repossessed assets, net
 
6,413

 
628

Net cash used in investing activities
 
$
(4,058,235
)
 
$
(1,444,179
)

9

 
 
Six Months Ended June 30,
 
 
2020
 
2019
 
 
(in thousands)
Cash flows from financing activities:
 
 
 
 
Net increase in deposits
 
$
4,748,093

 
$
2,262,452

Net proceeds from issuance of subordinated debt
 
222,093

 
—

Net increase (decrease) in borrowings
 
18,761

 
(499,490
)
Proceeds from exercise of common stock options
 
97

 
36

Cash paid for tax withholding on vested restricted stock
 
(7,855
)
 
(8,051
)
Common stock repurchases
 
(71,669
)
 
(71,913
)
Cash dividends paid on common stock
 
(50,820
)
 
—

Net cash provided by financing activities
 
$
4,858,700

 
$
1,683,034

Net increase in cash, cash equivalents, and restricted cash
 
1,083,867

 
569,135

Cash, cash equivalents, and restricted cash at beginning of period
 
434,596

 
498,572

Cash, cash equivalents, and restricted cash at end of period
 
$
1,518,463

 
$
1,067,707

Supplemental disclosure:
 
 
 
 
Cash paid (received) during the period for:
 
 
 
 
Interest
 
$
61,534

 
$
90,507

Income taxes, net of refunds
 
16,357

 
(26,994
)
See accompanying Notes to Unaudited Consolidated Financial Statements.


10

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operation
WAL is a bank holding company headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware. WAL provides a full spectrum of deposit, lending, treasury management, international banking, and online banking products and services through its wholly-owned banking subsidiary, WAB.
WAB operates the following full-service banking divisions: ABA, BON, FIB, Bridge, and TPB. The Company also serves business customers through a national platform of specialized financial services. In addition, the Company has two non-bank subsidiaries: LVSP, which held and managed certain OREO properties, and CSI, a captive insurance company formed and licensed under the laws of the State of Arizona and established as part of the Company's overall enterprise risk management strategy.
Basis of presentation
The accounting and reporting policies of the Company are in accordance with GAAP and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiaries are included in the Consolidated Financial Statements.
Recent accounting pronouncements
Income Taxes
In December 2019, the FASB issued guidance within ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 are intended to reduce the cost and complexity of applying ASC 740. The amendments that are applicable to the Company address: 1) franchise and other taxes partially based on income; 2) step-up in basis of goodwill in a business combination; 3) allocation of tax expense in separate entity financial statements; and 4) interim recognition of enactment of tax laws or rate changes. The amendments to Topic 740 are effective for interim and annual reporting periods beginning after December 15, 2020 and are not expected to have a material impact on the Company’s Consolidated Financial Statements.
Recently adopted accounting guidance
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance within ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new standard significantly changes the impairment model for most financial assets that are measured at amortized cost, including off-balance sheet credit exposures, from an incurred loss model to an expected loss model. The amendments in ASU 2016-13 to Topic 326, Financial Instruments - Credit Losses, require that an organization measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also requires enhanced disclosures, including qualitative and quantitative disclosures that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on AFS debt securities and purchased financial assets with credit deterioration.
The Company adopted the amendments within ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company's financial results for reporting periods beginning after January 1, 2020 are presented in accordance with ASC 326, while prior period amounts continue to be reported in accordance with legacy GAAP. The Company recorded a cumulative effect adjustment to retained earnings, which resulted in a total decrease to retained earnings of $24.9 million as of January 1, 2020. This adjustment was due primarily to expected total losses under the new model in the Company's loan portfolio and, to a lesser extent, its off-balance sheet credit exposures.
The Company applied the prospective transition approach for loans purchased with credit deterioration that were previously classified as purchased credit impaired and previously accounted for under ASC 310-30. In accordance with the new standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. As of January 1, 2020, the amortized cost basis of the PCD loans was adjusted to reflect an allowance for credit losses of $3.3 million. The remaining noncredit discount (based on the adjusted amortized cost basis) related to PCD loans of $1.1 million will be accreted into interest income at the loan's effective interest rate as of January 1, 2020. The Company has elected not to maintain its pools of loans accounted for under ASC 310-30.

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The Company applied the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date. The effective interest rate on these debt securities was not changed. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.
The following table summarizes the estimated allowance for credit losses related to financial assets and off-balance sheet credit exposures and the corresponding impacts on the deferred tax asset and retained earnings upon adoption of ASC 326:
 
January 1, 2020
 
Pre-ASC 326 Adoption
 
Post-ASC 326 Adoption
 
Impact of ASC 326 Adoption
 
(in thousands)
Assets:
 
 
 
 
 
Allowance for credit losses on HTM securities
$
—

 
$
2,646

 
$
2,646

Allowance for credit losses on loans
167,797

 
186,925

 
19,128

Deferred tax asset
18,025

 
26,675

 
8,650

Liabilities:
 
 
 
 
 
Off-balance sheet credit exposures
$
8,955

 
$
24,044

 
$
15,089

Equity:
 
 
 
 
 
Retained earnings
$
1,680,317

 
$
1,655,370

 
$
(24,947
)
Management has elected to take advantage of the capital relief option that delays the estimated impact of the adoption of ASC 326 on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay.
In April 2019, the FASB issued guidance within ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in ASU 2019-04 clarify or correct the guidance in these Topics. With respect to Topic 326, ASU 2019-04 addresses a number of issues as it relates to the CECL standard including consideration of accrued interest, recoveries, variable-rate financial instruments, prepayments, and extension and renewal options, among other things, in the measurement of expected credit losses. The amendments to Topic 326 were adopted concurrently with ASU 2016-13 and did not have a significant impact on the Company’s Consolidated Financial Statements. With respect to Topic 815, Derivatives and Hedging, ASU 2019-04 clarifies issues related to partial-term hedges, hedged debt securities, and transitioning from a quantitative method of assessing hedge effectiveness to a more simplified method. The Company does not have partial-term hedges or any hedged debt securities and the transition issues discussed in the ASU 2019-04 are not applicable to the Company. Accordingly, the amendments to Topic 815 did not have an impact on the Company's Consolidated Financial Statements. With respect to Topic 825, Financial Instruments, on recognizing and measuring financial instruments, ASU 2019-04 addresses: 1) the scope of the guidance; 2) the requirement for remeasurement under ASC 820 when using the measurement alternative for equity securities without readily determinable fair values; 3) certain disclosure requirements; and 4) which equity securities have to be remeasured at historical exchange rates. The amendments to Topic 825 were effective January 1, 2020 and did not have a material impact on the Company’s Consolidated Financial Statements.
In May 2019, the FASB issued guidance within ASU 2019-05, Financial Instruments - Credit Losses, to provide entities with an option to irrevocably elect the fair value option for eligible financial assets measured at amortized cost. The election is to be applied on an instrument-by-instrument basis upon adoption of Topic 326 and is not available for either AFS or HTM debt securities. The amendments in ASU 2019-05 should be applied on a modified-retrospective basis through a cumulative-effect adjustment to the opening balance of retained earnings as of the date that an entity adopts the amendments in ASU 2016-13. The Company did not elect this fair value option as part of its adoption of ASU 2016-13 on January 1, 2020.
In November 2019, the FASB issued guidance within ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments in ASU 2019-11 clarify or address specific issues about certain aspects of the amendments in ASU 2016-13. These issues include measurement and reporting requirements related to: 1) the allowance for credit losses for purchased assets with credit deterioration; 2) prepayment assumptions on existing troubled debt restructurings; 3) extension of disclosure relief for accrued interest receivable balances; and 4) expected credit losses on collateralized financial assets. The adoption of ASU 2019-11 is concurrent with ASU 2016-13 and, adoption of these amendments on January 1, 2020, did not have a significant impact on the Company's Consolidated Financial Statements.

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Fair Value Measurements
In August 2018, the FASB issued guidance within ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments within ASU 2018-13 remove, modify, and supplement the disclosure requirements for fair value measurements. Disclosure requirements that were removed include: 1) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; 2) the policy for timing of transfers between levels; and 3) the valuation processes for Level 3 fair value measurements. The amendments clarify that the measurement uncertainty disclosure is intended to communicate information about the uncertainty in measurement as of the reporting date. Additional disclosure requirements include: 1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. With the exception of the above additional disclosure requirements, which will be applied prospectively, all other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments in this ASU did not have a significant impact on the Company's Consolidated Financial Statements.
Internal-Use Software
In August 2018, the FASB issued guidance within ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments in this Update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments in this Update also require that the capitalized implementation costs of a hosting arrangement that is a service contract be expensed over the term of the hosting arrangement. Presentation requirements include: 1) expense related to the capitalized implementation costs should be presented in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement; 2) payments for capitalized implementation costs in the statement of cash flows should be classified in the same manner as payments made for fees associated with the hosting element; and 3) capitalized implementation costs in the statement of financial position should be presented in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The adoption of this guidance did not have a significant impact on the Company's Consolidated Financial Statements.
Reference Rate Reform
In March 2020, the FASB issued guidance within ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the scheduled discontinuation of LIBOR on December 31, 2021. The amendments in this Update provide optional guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings) necessitated by reference rate reform.
The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) modifications of contracts within the scope of Topic 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required under this Topic for modifications not accounted for as separate contracts; 3) modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging- Embedded Derivatives; and 4) for other Topics or Industry Subtopics in the Codification, the amendments in this Update also include a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. An entity may make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.
The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022.

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Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management's estimates and judgments are ongoing and are based on experience, current and expected future conditions, third-party evaluations and various other assumptions that management believes are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities, as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from those estimates and assumptions used in the Consolidated Financial Statements and related notes. Material estimates that are susceptible to significant changes in the near term, particularly to the extent that economic conditions worsen or persist longer than expected in an adverse state, relate to: the determination of the allowance for credit losses; certain assets and liabilities carried at fair value; and accounting for income taxes.
Principles of consolidation
As of June 30, 2020, WAL has the following significant wholly-owned subsidiaries: WAB and eight unconsolidated subsidiaries used as business trusts in connection with the issuance of trust-preferred securities.
The Bank has the following significant wholly-owned subsidiaries: WABT, which holds certain investment securities, municipal and nonprofit loans, and leases; WA PWI, which holds interests in certain limited partnerships invested primarily in low income housing tax credits and small business investment corporations; Helios Prime, which holds interests in certain limited partnerships invested in renewable energy projects; and BW Real Estate, Inc., which operates as a real estate investment trust and holds certain of WAB's real estate loans and related securities.
The Company does not have any other significant entities that should be consolidated. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts reported in prior periods may have been reclassified in the Consolidated Financial Statements to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.
Interim financial information
The accompanying Unaudited Consolidated Financial Statements as of and for the three and six months ended June 30, 2020 and 2019 have been prepared in condensed format and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to the Company's audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal, recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the Company's audited Consolidated Financial Statements.
Investment securities
Investment securities include debt and equity securities. Debt securities may be classified as HTM, AFS, or trading. The appropriate classification is initially decided at the time of purchase. Securities classified as HTM are those debt securities that the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or general economic conditions. The sale of an HTM security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure. Securities classified as AFS are securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.
HTM securities are carried at amortized cost. AFS securities are carried at their estimated fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. When AFS debt securities are sold, the unrealized gains or losses are reclassified from OCI to non-interest income. Trading securities are carried at their estimated fair value, with changes in fair value reported in earnings as part of non-interest income.

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Equity securities are carried at their estimated fair value, with changes in fair value reported in earnings as part of non-interest income.
Interest income is recognized based on the coupon rate and includes the amortization of purchase premiums and the accretion of purchase discounts. Premiums and discounts on investment securities are generally amortized or accreted over the contractual life of the security using the interest method, adjusted for prepayment estimates. Gains and losses on the sale of investment securities are recorded on the trade date and determined using the specific identification method.
A debt security is placed on nonaccrual status at the time its principal or interest payments become 90 days past due. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.
Allowance for credit losses on investment securities
On January 1, 2020, the Company adopted the amendments within ASU 2016-13, which replaces the legacy US GAAP OTTI model with a credit loss model. For discussion of the former OTTI methodology, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The credit loss model under ASC 326-20, applicable to HTM debt securities, requires recognition of lifetime expected credit losses through an allowance account at the time the security is purchased. The Company measures expected credit losses on its HTM debt securities on a collective basis by major security type. The Company's HTM securities portfolio consists of low income housing tax-exempt bonds, which share similar risk characteristics with the Company's CRE, non-owner occupied or construction and land loan pools, given the similarity in underlying assets or collateral. Accordingly, expected credit losses on HTM securities are estimated using the same models and approaches as these loan pools, which utilize risk parameters (probability of default, loss given default, and exposure at default) in the measurement of expected credit losses. The historical data used to estimate probability of default and severity of loss in the event of default is derived or obtained from internal and external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the securities on those historical losses. Accrued interest receivable on the HTM securities, which is included in other assets on the Consolidated Balance Sheet, is excluded from the estimate of expected credit losses.
The credit loss model under ASC 326-30, applicable to AFS debt securities, requires recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. For AFS debt securities, a decline in fair value due to credit loss results in recognition of an allowance for credit losses. Impairment may result from credit deterioration of the issuer or collateral underlying the security. The assessment of determining if a decline in fair value resulted from a credit loss is performed at the individual security level. Among other factors, the Company considers: 1) the extent to which the fair value is less than the amortized cost basis; 2) the financial condition and near term prospects of the issuer, including consideration of relevant financial metrics or ratios of the issuer; 3) any adverse conditions related to an industry or geographic area of an issuer; 4) any changes to the rating of the security by a rating agency; and 5) any past due principal or interest payments from the issuer. If an assessment of the above factors indicates that a credit loss exists, the Company records an allowance for credit losses for the excess of the amortized cost basis over the present value of cash flows expected to be collected, limited to the amount that the security's fair value is less than its amortized cost basis. Subsequent changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized in earnings. Any interest received after the security has been placed on nonaccrual status is recognized on a cash basis. Accrued interest receivable on AFS securities, which is included in other assets on the Consolidated Balance Sheet, is excluded from the estimate of expected credit losses.
For each AFS security in an unrealized loss position, the Company also considers: 1) its intent to retain the security until anticipated recovery of the security's fair value; and 2) whether it is more-likely-than not that the Company would be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security is written down to its fair value and the write-down is charged against the allowance for credit losses with any incremental impairment recorded in earnings.
Writeoffs are made through reversal of the allowance for credit losses and direct writeoff of the amortized cost basis of the AFS security. The Company considers the following events to be indicators that a writeoff should be taken: 1) bankruptcy of the issuer; 2) significant adverse event(s) affecting the issuer in which it is improbable for the issuer to make its remaining payments on the security; and 3) significant loss of value of the underlying collateral behind a security. Recoveries on debt securities, if any, are recorded in the period received.

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Restricted stock
WAB is a member of the Federal Reserve System and, as part of its membership, is required to maintain stock in the FRB in a specified ratio to its capital. In addition, WAB is a member of the FHLB system and, accordingly, maintains an investment in capital stock of the FHLB based on the borrowing capacity used. These investments are considered equity securities with no actively traded market. Therefore, the shares are considered restricted investment securities. These investments are carried at cost, which is equal to the value at which they may be redeemed. The dividend income received from the stock is reported in interest income. The Company conducts a periodic review and evaluation of its restricted stock to determine if any impairment exists. No impairment has been recorded to date.
Loans held for sale
Loans held for sale consist of loans that the Company originates (or acquires) and intends to sell. These loans are carried at the lower of aggregate cost or fair value. Fair value is determined based on quoted fair market values or, when not available, discounted cash flows or appraisals of underlying collateral or the credit quality of the borrower. Gains and losses on the sale of loans are recognized pursuant to ASC 860, Transfers and Servicing. Interest income on these loans is accrued daily and loan origination fees and costs are deferred and included in the cost basis of the loan. The Company issues various representations and warranties associated with these loan sales. The Company has not experienced any losses as a result of these representations and warranties.
Loans held for investment
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the amount of unpaid principal, adjusted for unamortized net deferred fees and costs, premiums and discounts, and writeoffs. In addition, the amortized cost of loans subject to a fair value hedge are adjusted for changes in value attributable to the effective portion of the hedged benchmark interest rate risk.
The Company may also purchase loans or acquire loans through a business combination. At the purchase or acquisition date, loans are evaluated to determine if there has been more than insignificant credit deterioration since origination. Loans that have experienced more than insignificant credit deterioration since origination are referred to as PCD loans. In its evaluation of whether a loan has experienced more than insignificant deterioration in credit quality since origination, the Company takes into consideration loan grades, loan-to-values greater than policy limits, past due and nonaccrual status, and TDR loans. The Company may also consider external credit rating agency ratings for borrowers and for non-commercial loans, FICO score or band, probability of default levels, number of times past due, and standard deviations corresponding to FICO score or band. The initial estimate of credit losses on PCD loans is added to the purchase price on the acquisition date to establish the initial amortized cost basis of the loan; accordingly, the initial recognition of expected credit losses has no impact on net income. When the initial measurement of expected credit losses on PCD loans are calculated on a pooled loan basis, the expected credit losses are allocated to each loan within the pool. Any difference between the initial amortized cost basis and the unpaid principal balance of the loan represents a noncredit discount or premium, which is accreted (or amortized) into interest income over the life of the loan. Subsequent changes to the allowance for credit losses on PCD loans are recorded through the provision for credit losses. For purchased loans that are not deemed to have experienced more than insignificant credit deterioration since origination, any discounts or premiums included in the purchase price are accreted (or amortized) over the contractual life of the individual loan. For additional information, see "Note 3. Loans, Leases and Allowance for Credit Losses" of these Notes to Unaudited Consolidated Financial Statements.
In applying the effective yield method to loans, the Company generally applies the contractual method whereby loan fees collected for the origination of loans less direct loan origination costs (net of deferred loan fees), as well as premiums and discounts and certain purchase accounting adjustments, are amortized over the contractual life of the loan through interest income. If a loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the contractual life of the loan. If a loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period. When loans are repaid, any remaining unamortized balances of premiums, discounts, or net deferred fees are recognized as interest income.
Conversely, with respect to loans originated under the PPP, the Company incorporates projected prepayments in calculating effective yield. As a result, net deferred fees are accreted into interest income faster than would be the case when applying the contractual method based upon the timing and amount of estimated forgiven loan balances. The Company expects that a majority of PPP loans will qualify for forgiveness under the SBA program, based on requested loan amounts largely representing qualifying expenses at the time of application.

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Nonaccrual loans
When a borrower discontinues making payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest. The Company ceases accruing interest income when the loan has become delinquent by more than 90 days or when management determines that the full repayment of principal and collection of interest according to contractual terms is no longer likely. Past due status is based on the contractual terms of the loan. The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent if the loans are well secured by collateral and in the process of collection.
For all loan types, when a loan is placed on nonaccrual status, all interest accrued but uncollected is reversed against interest income in the period in which the status is changed, and the Company makes a loan-level decision to apply either the cash basis or cost recovery method. The Company may recognize income on a cash basis when a payment is received and only for those nonaccrual loans for which the collection of the remaining principal balance is not in doubt. Under the cost recovery method, subsequent payments received from the customer are applied to principal and generally no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Troubled Debt Restructured Loans
A TDR loan is a loan on which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The evaluation is performed under the Company's internal underwriting policy. The loan terms that may be modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in the accrued interest, or deferral of interest payments. A TDR loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a reasonable period of time (generally six months), and the ultimate collectability of the total contractual restructured principal and interest is no longer in doubt. Consistent with regulatory guidance, a TDR loan that is subsequently modified in another restructuring agreement but has shown sustained performance and classification as a TDR, will be removed from TDR status provided that the modified terms were market-based at the time of modification.
The CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. The Company is applying this guidance to qualifying loan modifications.
Credit quality indicators
Loans are regularly reviewed to assess credit quality indicators and to determine appropriate loan classification and grading in accordance with applicable bank regulations. The Company’s risk rating methodology assigns risk ratings ranging from 1 to 9, where a higher rating represents higher risk. The Company differentiates its loan segments based on shared risk characteristics for which expected credit loss is measured on a pool basis.
The nine risk rating categories can be generally described by the following groupings for loans:
"Pass" (grades 1 through 5): The Company has five pass risk ratings, which represent a level of credit quality that ranges from no well-defined deficiency or weakness to some noted weakness; however, the risk of default on any loan classified as pass is expected to be remote. The five pass risk ratings are described below:
Minimal risk. These consist of loans that are fully secured either with cash held in a deposit account at the Bank or by readily marketable securities with an acceptable margin based on the type of security pledged.
Low risk. These consist of loans with a high investment grade rating equivalent.

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Modest risk. These consist of loans where the credit facility greatly exceeds all policy requirements or with policy exceptions that are appropriately mitigated. A secondary source of repayment is verified and considered sustainable. Collateral coverage on these loans is sufficient to fully cover the debt as a tertiary source of repayment. Debt of the borrower is low relative to borrower’s financial strength and ability to pay.
Average risk. These consist of loans where the credit facility meets or exceeds all policy requirements or with policy exceptions that are appropriately mitigated. A secondary source of repayment is available to service the debt. Collateral coverage is more than adequate to cover the debt. The borrower exhibits acceptable cash flow and moderate leverage.
Acceptable risk. These consist of loans with an acceptable primary source of repayment, but a less than preferable secondary source of repayment. Cash flow is adequate to service debt, but there is minimal excess cash flow. Leverage is moderate or high.
"Special mention" (grade 6): Generally these are assets that possess potential weaknesses that warrant management's close attention. These loans may involve borrowers with adverse financial trends, higher debt-to-equity ratios, or weaker liquidity positions, but not to the degree of being considered a “problem loan” where risk of loss may be apparent. Loans in this category are usually performing as agreed, although there may be non-compliance with financial covenants.
"Substandard" (grade 7): These assets are characterized by well-defined credit weaknesses and carry the distinct possibility that the Company will sustain some loss if such weakness or deficiency is not corrected. All loans 90 days or more past due and all loans on nonaccrual status are considered at least "Substandard," unless extraordinary circumstances would suggest otherwise.
"Doubtful" (grade 8): These assets have all the weaknesses inherent in those classified as "Substandard" with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable, but because of certain known factors that may work to the advantage and strengthening of the asset (for example, capital injection, perfecting liens on additional collateral and refinancing plans), classification as an estimated loss is deferred until a more precise status may be determined. Due to the high probability of loss, loans classified as "Doubtful" are placed on nonaccrual status.
"Loss" (grade 9): These assets are considered uncollectible and having such little recoverable value that it is not practical to defer writing off the asset. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practicable or desirable to defer writing off the asset, even though partial recovery may be achieved in the future.
Allowance for credit losses on loans
On January 1, 2020, the Company adopted the amendments within ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets carried at amortized cost from an incurred loss model to an expected loss model. The discussion below reflects the current expected credit loss model methodology. For discussion of the former incurred loss model methodology, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Credit risk is inherent in the business of extending loans and leases to borrowers and is continuously monitored by management and reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of life of loan losses for the Company's loans held for investment. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of a loan to present the net amount expected to be collected on the loan. Accrued interest receivable on loans, which is included in other assets on the Consolidated Balance Sheet, is excluded from the estimate of expected credit losses. Expected recoveries of amounts previously written off and expected to be written off are included in the valuation account and may not exceed the aggregate of amounts previously written off and expected to be written off. The Company formally re-evaluates and establishes the appropriate level of the allowance for credit losses on a quarterly basis.
Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio or particular segments of the loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance for credit losses and credit loss expense in those future periods. The allowance level is influenced by loan volumes, mix, loan performance metrics, asset quality characteristics, delinquency status, historical credit loss experience, and the inputs and assumptions in economic forecasts, such as macroeconomic inputs, length of reasonable and supportable forecast periods, and reversion methods. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans and; second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

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Loans that do not share risk characteristics with other loans
Loans that do not share risk characteristics with other loans are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. These loans consist of loans with unique features or loans that no longer share risk characteristics with other pooled loans. The process for determining whether a loan should be evaluated on an individual basis begins with determination of credit rating. All loans graded substandard or worse and all PCD loans, irrespective of credit rating, are specifically reviewed for loss potential and, when deemed appropriate, are assigned a reserve based on an individual evaluation. For these loans, the allowance is based primarily on the fair value of the underlying collateral, utilizing independent third-party appraisals.
Loans that share similar risk characteristics with other loans
In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such loans are segregated into loan segments. The Company's primary portfolio segments have changed due to adoption of the amendments within ASU 2016-13 to align with the methodology applied in estimating the allowance for credit losses under CECL. Loans are designated into loan segments based on loans pooled by product types, business lines, and similar risk characteristics or areas of risk concentration.
In determining the allowance for credit losses, the Company derives an estimate of expected credit losses primarily using an expected loss methodology that incorporates risk parameters (probability of default, loss given default, and exposure at default), which are derived from various vendor models, internally-developed statistical models, or non-statistical estimation approaches. Probability of default is projected in these models or estimation approaches using multiple economic scenarios, whose outcomes are weighted based on the Company's economic outlook and were developed to incorporate relevant information about past events, current conditions, and reasonable and supportable forecasts. With the exception of the Company's residential loan segment, the Company's PD models share a common definition of default, which include loans that are 90 days past due, on nonaccrual status, have a writeoff, or obligor bankruptcy. Input reversion is used for all loan segment models, except for the commercial and industrial and CRE, owner-occupied loan segments. Output reversion is used for the commercial and industrial and CRE, owner-occupied segments by incorporating, after the forecast period, a one-year linear reversion to the long-term reversion rate in year three through the remaining life of the loans within the respective segments. LGDs are typically derived from the Company's historical loss experience. However, for the residential, warehouse lending, and municipal and nonprofit loan segments, where the Company has either zero (or near zero) losses, or has a limited loss history through the last economic downturn, certain non-modeled methodologies are employed. Factors utilized in calculating average LGD vary for each loan segment and are further described below. Exposure at default refers to the Company's exposure to loss at the time of borrower default and is calculated using an amortization schedule based on contractual loan terms, adjusted for a prepayment rate assumption. For most of the Company's loan segments, prepayment rate assumptions are based on a non-modeled approach that calculates the number of loans that were prepaid in full during the period divided by the total number of loans outstanding at the beginning of the period. Prepayment trends are sensitive to interest rates and the macroeconomic environment. Fixed rate loans are more influenced by interest rates, whereas variable rate loans are more influenced by the macroeconomic environment. After the quantitative expected loss estimates are calculated, management then adjusts these estimates to incorporate considerations of current trends and conditions that are not captured in the quantitative loss estimates, through the use of qualitative and/or environmental factors.
The following provides credit quality indicators and risk elements most relevant in monitoring and measuring the allowance for credit losses for each of the loan portfolio segments identified:
Commercial and industrial
The commercial and industrial portfolio segment is comprised of commercial loans that are not collateralized by real estate. The source of repayment of these loans is generally expected to be the income that is generated from the business. The models used to estimate expected credit losses for this loan segment include a combination of a vendor model and an internally-developed model. These models incorporate both market level and company-specific factors such as financial statement variables, adjusted for the current stage of the credit cycle and for the Company's loan performance data such as delinquency, utilization, maturity, and size of the loan commitment under specific macroeconomic scenarios to produce a probability of default. Macroeconomic variables include the Dow Jones Index, credit spread between the BBB Bond Yield and 10-Year Treasury Bond Yield, unemployment rate, and CBOE VIX Index quarterly high. Loss given default and the prepayment rate assumption for EAD for this loan segment are driven by unemployment levels.

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Commercial real estate, owner-occupied
The CRE, owner-occupied portfolio segment is comprised of commercial loans that are collateralized by real estate, where the primary source of repayment is the business that occupies the property. These loans are typically entered into for the purpose of providing real estate finance or improvement. The primary source of repayment of these loans is the income generated by the business and where rental or sale of the property may provide secondary support for the loan. These loans are sensitive to general economic conditions as well as the market valuation of CRE properties. The probability of default estimate for this loan segment is modeled using the same model as the commercial and industrial loan segment. Loss given default for this loan segment is driven by property appreciation and the prepayment rate assumption for EAD is driven by unemployment levels.
Commercial real estate, non-owner occupied
The CRE, non-owner occupied segment is comprised of loans that are collateralized by real estate, where the owner is not the primary tenant. These loans are typically entered into for the purpose of financing or the improvement of commercial investment properties. The primary source of repayment of these loans are the rents paid by tenants and where the sale of the property may provide secondary support for the loan. These loans are sensitive to the market valuation of CRE properties, rental rates, and general economic conditions. The vendor model used to estimate expected credit losses for this loan segment projects probabilities of default and exposure at default based on multiple macroeconomic scenarios by modeling how macroeconomic conditions affect the commercial real estate market. Real estate market factors utilized in this model include vacancy rate, rental growth rate, net operating income growth rate, and commercial property price changes for each specific property type. The model then incorporates loan and property-level characteristics including debt coverage, leverage, collateral size, seasoning, and property type. Loss given default for this loan segment is derived from a non-modeled approach that is driven by property appreciation and the prepayment rate assumption for EAD is driven by the property appreciation for fixed rate loans and unemployment levels for variable rate loans.
Residential
The residential loan portfolio segment is comprised of loans collateralized primarily by first liens on residential properties and home equity lines of credit that are collateralized by both first and junior liens on residential properties. The primary source of repayment of these loans is the value of the property and the capacity of the owner to make payments on the loan. Unemployment rates and the market valuation of residential properties will impact the ultimate repayment of these loans. The residential mortgage loan model is a vendor model that projects probability of default, loss given default severity, prepayment rate, and exposure at default to calculate expected losses. The model is intended to capture the borrower's payment behavior during the lifetime of the residential loan by incorporating loan level characteristics such as loan type, coupon, age, loan-to-value, and credit score and economic conditions such as Home Price Index, interest rate, and unemployment rate. A default event for residential loans is defined as 60 days or more past due, with property appreciation as the driver for LGD results. The prepayment rate assumption for exposure at default for residential loans is based on industry prepayment history.
Probability of default for HELOCs is derived from an internally-developed model that projects PD by incorporating loan level information such as FICO score, lien position, balloon payments, and macroeconomic conditions such as property appreciation. Loss given default for this loan segment is driven by property appreciation and lien position. Exposure at default for HELOCs is calculated based on utilization rate assumptions using a non-modeled approach and incorporates management judgment.
Construction and land development
The construction and land portfolio segment is comprised of loans collateralized by land or real estate, which are entered into for the purpose of real estate development. The primary source of repayment of loans is the eventual sale or refinance of the completed project and where claims on the property provide secondary support for the loan. These loans are impacted by the market valuation of CRE and residential properties and general economic conditions that have a higher sensitivity to real estate markets compared to other real estate loans. Default risk of a property is driven by loan-specific drivers, including loan-to-value, maturity, origination date, and the metropolitan statistical area ("MSA") in which the property is located, among other items. The variables used in the internally-developed model include loan level drivers such as origination loan-to-value, loan maturity, and macroeconomic drivers such as property appreciation, MSA level unemployment rate, and national GDP growth. Loss given default for this loan segment is driven by property appreciation. The prepayment rate assumption for EAD is driven by the property appreciation for fixed rate loans and unemployment levels for variable rate loans.

20

Warehouse lending
The warehouse lending portfolio segment consists of loans that have a monitored base to mortgage companies and similar lenders. These loans are collateralized by real estate notes and mortgages or mortgage servicing rights and the borrowing base of these loans is tightly monitored and controlled by the Company. The primary support for the loan takes the form of pledged collateral, with secondary support provided by the capacity of the financial institution. The collateral-driven nature of these loans distinguish them from traditional commercial and industrial loans. These loans are impacted by interest rate shocks and general real estate stress. As a result of the unique loan characteristics, limited historical default and loss experience, and the collateral nature of this loan portfolio segment, the Company uses a non-modeled approach to estimate expected credit losses, leveraging grade information, grade migration history, and management judgment.
Municipal and nonprofit
The municipal and nonprofit portfolio segment consists of loans to local governments, government-operated utilities, special assessment districts, hospitals, schools and other nonprofits. These loans are generally, but not exclusively, entered into for the purpose of financing real estate investment or for refinancing existing debt. Loans are supported by taxes or utility fees, and in some cases tax liens on real estate, operating revenue of the institution, or other collateral support the loans. Unemployment rates and the market valuation of residential properties have an effect on the tax revenues supporting these loans; however, these loans tend to be less cyclical in comparison to similar commercial loans as these loans rely on diversified tax bases. The Company uses a non-modeled approach to estimate expected credit losses, leveraging grade information and historical municipal default rates.
Other
This portfolio consists of those loans not already captured in one of the aforementioned loan portfolio segments, which include, but may not be limited to, overdraft lines for treasury services, consumer loans not collateralized by real estate, and small business loans collateralized by residential real estate. The consumer and small business loans are supported by the capacity of the borrower and the valuation of any collateral. General economic factors such as unemployment will have an effect on these loans. The Company uses a non-modeled approach to estimate expected credit losses, leveraging average historical default rates. Loss given default for this loan segment is driven by unemployment levels and lien position. The prepayment rate assumption for EAD is driven by the BBB corporate spread for fixed rate loans and unemployment levels for variable rate loans.
Off-balance sheet credit exposures, including unfunded loan commitments
The Company maintains a separate allowance for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, financial guarantees, and letters of credit, which is classified in other liabilities on the Consolidated Balance Sheet. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, an estimate of exposure at default that is derived from utilization rate assumptions using a non-modeled approach, and PD and LGD estimates that are derived from the same models and approaches for the Company's other loan portfolio segments described above as these unfunded commitments share similar risk characteristics with these loan portfolio segments. No credit loss estimate is reported for off-balance sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement.
Leases (lessee)
At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are determined to be an operating lease, a corresponding ROU asset and operating lease liability are recorded in separate line items on the Consolidated Balance Sheet. A ROU asset represents the Company’s right to use an underlying asset during the lease term and a lease liability represents the Company’s commitment to make contractually obligated lease payments. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. The measurement of the operating lease ROU asset includes any lease payments made and is reduced by lease incentives that are paid or are payable to the Company. Variable lease payments that depend on an index or rate such as the Consumer Price Index are included in lease payments based on the rate in effect at the commencement date of the lease. Lease payments are recognized on a straight-line basis as part of occupancy expense over the lease term.
As the rate implicit in the lease is not readily determinable, the Company's incremental collateralized borrowing rate is used to determine the present value of lease payments. This rate gives consideration to the applicable FHLB collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less; therefore, these leases are not recorded on the Company’s Consolidated Balance Sheet, but rather, lease expense is recognized over the lease term on a straight-line basis.

21

The Company’s lease agreements may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that the options will be exercised.
In addition to the package of practical expedients, the Company also elected the practical expedient that allows lessees to make an accounting policy election to not separate non-lease components from the associated lease component, and instead account for them all together as part of the applicable lease component. This practical expedient can be elected separately for each underlying class of asset. The majority of the Company’s non-lease components such as common area maintenance, parking, and taxes are variable, and are expensed as incurred. Variable payment amounts are determined in arrears by the landlord depending on actual costs incurred.
Goodwill and other intangible assets
The Company records as goodwill the excess of the purchase price in a business combination over the fair value of the identifiable net assets acquired in accordance with applicable guidance. The Company performs its annual goodwill and intangibles impairment tests as of October 1 each year, or more often if events or circumstances indicate that the carrying value may not be recoverable. The Company can first elect to assess, through qualitative factors, whether it is more likely than not that goodwill is impaired. If the qualitative assessment indicates potential impairment, a quantitative impairment test is necessary. If, based on the quantitative test, a reporting unit's carrying amount exceeds its fair value, a goodwill impairment charge for this difference is recorded to current period earnings as non-interest expense.
The Company’s intangible assets consist primarily of core deposit intangible assets that are amortized over periods ranging from five to 10 years. The Company considers the remaining useful lives of its core deposit intangible assets each reporting period, as required by ASC 350, Intangibles—Goodwill and Other, to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. The Company did not revise its estimates of the useful lives of its core deposit intangibles during the three and six months ended June 30, 2020 or 2019.
Treasury shares
The Company separately presents treasury shares, which represent shares surrendered to the Company equal in value to the statutory payroll tax withholding obligations arising from the vesting of employee restricted stock awards. Treasury shares are carried at cost.
Common stock repurchases
On December 11, 2018, the Company adopted its common stock repurchase program, pursuant to which the Company was authorized to repurchase up to $250.0 million of its shares of common stock through December 31, 2019. All shares repurchased under the plan are retired upon settlement. The Company has elected to allocate the excess of the repurchase price over the par value of its common stock between APIC and retained earnings, with the portion allocated to APIC limited to the amount of APIC that was recorded at the time that the shares were initially issued, which is calculated on a last-in, first-out basis. The Company's common stock repurchase program was renewed through December 2020, authorizing the Company to repurchase up to an additional $250.0 million of its outstanding common stock.
Derivative financial instruments
The Company uses interest rate swaps to mitigate interest-rate risk associated with changes to the fair value of certain fixed-rate financial instruments (fair value hedges).
The Company recognizes derivatives as assets or liabilities on the Consolidated Balance Sheet at their fair value in accordance with ASC 815, Derivatives and Hedging. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk, are considered fair value hedges.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of derivatives not considered to be highly effective in hedging the change in fair value of the hedged item are recognized in earnings as non-interest income during the period of the change.
The Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction after the derivative contract is executed. At inception, the Company performs a quantitative assessment to determine whether the derivatives used in hedging transactions

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are highly effective (as defined in the guidance) in offsetting changes in the fair value of the hedged item. Retroactive effectiveness is assessed, as well as the continued expectation that the hedge will remain effective prospectively. After the initial quantitative assessment is performed, on a quarterly basis, the Company performs a qualitative hedge effectiveness assessment. This assessment takes into consideration any adverse developments related to the counterparty's risk of default and any negative events or circumstances that affect the factors that originally enabled the Company to assess that it could reasonably support, qualitatively, an expectation that the hedging relationship was and will continue to be highly effective. The Company discontinues hedge accounting prospectively when it is determined that a hedge is no longer highly effective. When hedge accounting is discontinued on a fair value hedge that no longer qualifies as an effective hedge, the derivative instrument continues to be reported at fair value on the Consolidated Balance Sheet, but the carrying amount of the hedged item is no longer adjusted for future changes in fair value. The adjustment to the carrying amount of the hedged item that existed at the date hedge accounting is discontinued is amortized over the remaining life of the hedged item into earnings.
Derivative instruments that are not designated as hedges, so called free-standing derivatives, are reported on the Consolidated Balance Sheet at fair value and the changes in fair value are recognized in earnings as non-interest income during the period of change.
The Company may in the normal course of business purchase a financial instrument or originate a loan that contains an embedded derivative instrument. Upon purchasing the instrument or originating the loan, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and carried at fair value. However, in cases where the host contract is measured at fair value, with changes in fair value reported in current earnings, or the Company is unable to reliably identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the Consolidated Balance Sheet at fair value and is not designated as a hedging instrument.
Off-balance sheet instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instrument arrangements consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Unaudited Consolidated Financial Statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the Consolidated Balance Sheet. Losses could be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and, in certain instances, may be unconditionally cancelable. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
The Company also has off-balance sheet arrangements related to its derivative instruments. Derivative instruments are recognized in the Consolidated Financial Statements at fair value and their notional values are carried off-balance sheet. See "Note 8. Derivatives and Hedging Activities" of these Notes to Unaudited Consolidated Financial Statements for further discussion.

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Fair values of financial instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. ASC 820, Fair Value Measurement, establishes a framework for measuring fair value and a three-level valuation hierarchy for disclosure of fair value measurement, and also sets forth disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The Company uses various valuation approaches, including market, income, and/or cost approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:
•
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.
•
Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.
The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant who may purchase the asset or assume the liability, rather than an entity-specific measure. When market assumptions are available, ASC 820 requires that the Company make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.
ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30, 2020 and December 31, 2019. The estimated fair value amounts for June 30, 2020 and December 31, 2019 have been measured as of period-end, and have not been re-evaluated or updated for purposes of these Unaudited Consolidated Financial Statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at period-end.
The information in "Note 12. Fair Value Accounting" of these Notes to Unaudited Consolidated Financial Statements should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.
Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.

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The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash, cash equivalents, and restricted cash
The carrying amounts reported on the Consolidated Balance Sheet for cash and due from banks approximate their fair value.
Money market investments
The carrying amounts reported on the Consolidated Balance Sheet for money market investments approximate their fair value.
Investment securities
The fair values of CRA investments, exchange-listed preferred stock, trust preferred securities, and certain corporate debt securities are based on quoted market prices and are categorized as Level 1 in the fair value hierarchy.
The fair values of debt securities are primarily determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings, and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy. For a small subset of securities, other pricing sources are used, including observed prices on publicly traded securities and dealer quotes.
Restricted stock
WAB is a member of the Federal Reserve System and the FHLB and, accordingly, maintains investments in the capital stock of the FRB and the FHLB. These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of its restricted stock to determine if any impairment exists. The fair values of these investments have been categorized as Level 2 in the fair value hierarchy.
Loans
The fair value of loans is estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality and adjustments that the Company believes a market participant would consider in determining fair value based on a third-party independent valuation. As a result, the fair value for loans is categorized as Level 2 in the fair value hierarchy, excluding collateral dependent and impaired loans, which are categorized as Level 3.
Accrued interest receivable and payable
The carrying amounts reported on the Consolidated Balance Sheet for accrued interest receivable and payable approximate their fair values.
Derivative financial instruments
All derivatives are recognized on the Consolidated Balance Sheets at their fair value. The fair value for derivatives is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters. As a result, the fair values have been categorized as Level 2 in the fair value hierarchy.
Deposits
The fair value disclosed for demand and savings deposits is by definition equal to the amount payable on demand at their reporting date (that is, their carrying amount) as these deposits do not have a contractual term. The carrying amount for variable rate deposit accounts approximates their fair value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on these deposits. The fair value measurement of the deposit liabilities is categorized as Level 2 in the fair value hierarchy.
FHLB advances and customer repurchase agreements
The fair values of the Company’s borrowings are estimated using discounted cash flow analyses, based on the market rates for similar types of borrowing arrangements. The FHLB advances and customer repurchase agreements have been categorized as Level 2 in the fair value hierarchy due to their short durations.
Subordinated debt
The fair value of subordinated debt is based on the market rate for the respective subordinated debt security. Subordinated debt has been categorized as Level 2 in the fair value hierarchy.

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Junior subordinated debt
Junior subordinated debt is valued based on a discounted cash flow model which uses as inputs Treasury Bond rates and the 'BB' and 'BBB' rated financial indexes. Junior subordinated debt has been categorized as Level 3 in the fair value hierarchy.
Off-balance sheet instruments
The fair value of the Company’s off-balance sheet instruments (lending commitments and letters of credit) is based on quoted fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, and the counterparties’ credit standing.
Income taxes
The Company is subject to income taxes in the United States and files a consolidated federal income tax return with all of its subsidiaries, with the exception of BW Real Estate, Inc. Deferred income taxes are recorded to reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their income tax bases using enacted tax rates that are expected to be in effect when the taxes are actually paid or recovered. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Net deferred tax assets are recorded to the extent that these assets will more-likely-than-not be realized. In making these determinations, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, tax planning strategies, projected future taxable income, and recent operating results. If it is determined that deferred income tax assets to be realized in the future are in excess of their net recorded amount, an adjustment to the valuation allowance will be recorded, which will reduce the Company's provision for income taxes.
A tax benefit from an unrecognized tax benefit may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including related appeals or litigation, based on technical merits. Income tax benefits must meet a more-likely-than-not recognition threshold at the effective date to be recognized.
Interest and penalties related to unrecognized tax benefits are recognized as part of the provision for income taxes in the Consolidated Income Statement. Accrued interest and penalties are included in the related tax liability line with other liabilities on the Consolidated Balance Sheet. See "Note 10. Income Taxes" of these Notes to Unaudited Consolidated Financial Statements for further discussion on income taxes.
Non-interest income
Non-interest income includes service charges and fees, income from equity investments, card income, foreign currency income, income from bank owned life insurance, lending related income, net gain or loss on sales of investment securities, net fair value gain or loss adjustments on assets measured at fair value, and other income. Service charges and fees consist of fees earned from performance of account analysis, general account services, and other deposit account services. These fees are recognized as the related services are provided in accordance with ASC 606, Revenue from Contracts with Customers. Income from equity investments includes gains on equity warrant assets, SBIC equity income, and success fees. Card income includes fees earned from customer use of debit and credit cards, interchange income from merchants, and international charges. Card income is generally within the scope of ASC 310, Receivables; however, certain processing transactions for merchants, such as interchange fees, are within the scope of ASC 606. Foreign currency income represents fees earned on the differential between purchases and sales of foreign currency on behalf of the Company’s clients. Income from bank owned life insurance is accounted for in accordance with ASC 325, Investments - Other. Lending related income includes fees earned from gains or losses on the sale of loans, SBA income, and letter of credit fees. Gains and losses on the sale of loans and SBA income are recognized pursuant to ASC 860, Transfers and Servicing. Net unrealized gains or losses on assets measured at fair value represent fair value changes in equity securities and are accounted for in accordance with ASC 321, Investments - Equity Securities. Fees related to standby letters of credit are accounted for in accordance with ASC 440, Commitments. Other income includes operating lease income, which is recognized on a straight-line basis over the lease term in accordance with ASC 842, Leases. Net gain or loss on sales/valuations of repossessed and other assets is presented as a component of non-interest expense, but may also be presented as a component of non-interest income in the event that a net gain is recognized. Net gain or loss on sales of repossessed and other assets are accounted for in accordance with ASC 610, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. See "Note 14. Revenue from Contracts with Customers" of these Notes to Unaudited Consolidated Financial Statements for further details related to the nature and timing of revenue recognition for non-interest income revenue streams within the scope of the new standard.

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2. INVESTMENT SECURITIES
The carrying amounts and fair values of investment securities at June 30, 2020 and December 31, 2019 are summarized as follows:
 
 
June 30, 2020
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
 
 
(in thousands)
Held-to-maturity
 
 
 
 
 
 
 
 
Tax-exempt
 
$
479,380

 
$
42,486

 
$
—

 
$
521,866

 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
CDO
 
$
50

 
$
7,252

 
$
—

 
$
7,302

Commercial MBS issued by GSEs
 
96,556

 
3,854

 
—

 
100,410

Corporate debt securities
 
106,386

 
4

 
(13,180
)
 
93,210

Municipal securities
 
10,007

 
86

 
(169
)
 
9,924

Private label residential MBS
 
997,122

 
19,456

 
(792
)
 
1,015,786

Residential MBS issued by GSEs
 
1,304,551

 
36,132

 
(226
)
 
1,340,457

Tax-exempt
 
881,723

 
46,134

 
(913
)
 
926,944

Trust preferred securities
 
32,000

 
—

 
(9,111
)
 
22,889

Total AFS debt securities
 
$
3,428,395

 
$
112,918

 
$
(24,391
)
 
$
3,516,922

 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
CRA investments
 
$
56,075

 
$
356

 
$
—

 
$
56,431

Preferred stock
 
84,889

 
1,423

 
(4,334
)
 
81,978

Total equity securities
 
$
140,964

 
$
1,779

 
$
(4,334
)
 
$
138,409


 
 
December 31, 2019
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
 
 
(in thousands)
Held-to-maturity
 
 
 
 
 
 
 
 
Tax-exempt
 
$
485,107

 
$
31,303

 
$
(149
)
 
$
516,261

 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
CDO
 
$
50

 
$
10,092

 
$
—

 
$
10,142

Commercial MBS issued by GSEs
 
95,062

 
366

 
(1,175
)
 
94,253

Corporate debt securities
 
105,015

 
112

 
(5,166
)
 
99,961

Municipal securities
 
7,494

 
279

 
—

 
7,773

Private label residential MBS
 
1,129,985

 
3,572

 
(4,330
)
 
1,129,227

Residential MBS issued by GSEs
 
1,406,594

 
9,283

 
(3,817
)
 
1,412,060

Tax-exempt
 
530,729

 
24,548

 
(422
)
 
554,855

Trust preferred securities
 
32,000

 
—

 
(4,960
)
 
27,040

U.S. government sponsored agency securities
 
10,000

 
—

 
—

 
10,000

U.S. treasury securities
 
999

 
—

 
—

 
999

Total AFS debt securities
 
$
3,317,928

 
$
48,252

 
$
(19,870
)
 
$
3,346,310

 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
CRA investments
 
$
52,805

 
$
—

 
$
(301
)
 
$
52,504

Preferred stock
 
82,514

 
3,881

 
(198
)
 
86,197

Total equity securities
 
$
135,319

 
$
3,881

 
$
(499
)
 
$
138,701


Securities with carrying amounts of approximately $950.7 million and $962.5 million at June 30, 2020 and December 31, 2019, respectively, were pledged for various purposes as required or permitted by law.

27

The following tables summarize the Company's AFS debt securities in an unrealized loss position at June 30, 2020 and December 31, 2019, aggregated by major security type and length of time in a continuous unrealized loss position: 
 
June 30, 2020
 
Less Than Twelve Months
 
More Than Twelve Months
 
Total
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
(in thousands)
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
$
30

 
$
4,356

 
$
13,150

 
$
86,850

 
$
13,180

 
$
91,206

Municipal securities
169

 
7,330

 
—

 
—

 
169

 
7,330

Private label residential MBS
777

 
34,812

 
15

 
6,718

 
792

 
41,530

Residential MBS issued by GSEs
224

 
46,854

 
2

 
412

 
226

 
47,266

Tax-exempt
913

 
64,845

 
—

 
—

 
913

 
64,845

Trust preferred securities
—

 
—

 
9,111

 
22,889

 
9,111

 
22,889

Total AFS securities
$
2,113

 
$
158,197

 
$
22,278

 
$
116,869

 
$
24,391

 
$
275,066

 
December 31, 2019
 
Less Than Twelve Months
 
More Than Twelve Months
 
Total
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
(in thousands)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt
$
149

 
$
24,325

 
$
—

 
$
—

 
$
149

 
$
24,325

Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
Commercial MBS issued by GSEs
$
85

 
$
9,035

 
$
1,090

 
$
54,604

 
$
1,175

 
$
63,639

Corporate debt securities
—

 
—

 
5,166

 
94,834

 
5,166

 
94,834

Private label residential MBS
1,776

 
337,285

 
2,554

 
258,791

 
4,330

 
596,076

Residential MBS issued by GSEs
1,740

 
385,643

 
2,077

 
150,419

 
3,817

 
536,062

Tax-exempt
422

 
67,150

 
—

 
—

 
422

 
67,150

Trust preferred securities
—

 
—

 
4,960

 
27,040

 
4,960

 
27,040

Total AFS securities
$
4,023

 
$
799,113

 
$
15,847

 
$
585,688

 
$
19,870

 
$
1,384,801


The total number of AFS securities in an unrealized loss position at June 30, 2020 is 50, compared to 158 at December 31, 2019.
On January 1, 2020, the Company adopted the amendments within ASU 2016-13, which replaces the legacy US GAAP OTTI model with a credit loss model. The credit loss model under ASC 326-30, applicable to AFS debt securities, requires recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. For a detailed discussion of the impact of adoption of ASU 2016-13 and information related to investment securities, including accounting policies and methodologies used to estimate the allowance for credit losses on securities, see "Note 1. Summary of Significant Accounting Policies."
Commercial and residential MBS issued by GSEs held by the Company are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities prior to their anticipated recovery, no credit losses have been recognized on these securities during the three and six months ended June 30, 2020.
Qualitative factors used in the Company's credit loss assessment of its securities that are not guaranteed by the U.S. government included consideration of any adverse conditions related to a specific security, industry, or geographic region of its securities, any credit ratings below investment grade, the payment structure of the security and the likelihood of the issuer to be able to make payments that increase in the future, and failure of the issuer to make any scheduled principal or interest payments. For the Company's corporate debt, municipal, and tax-exempt securities, the Company also considered various metrics of the issuer including days of cash on hand, the ratio of long-term debt to total assets, the net change in cash between reporting periods, and consideration of any breach in covenant requirements. For the Company's private label residential MBS, the Company also considered metrics such as securitization risk weight factor, current credit support, whether there were any mortgage principal

28

losses resulting from defaults in payments on the underlying mortgage collateral, and the credit default rate over the last twelve months.
As of June 30, 2020, no credit losses on the Company's corporate debt, tax-exempt, and municipal securities have been recognized. The Company's corporate debt and tax-exempt securities continue to be highly rated, issuers continue to make timely principal and interest payments, and the unrealized losses on these security portfolios primarily relate to changes in interest rates and other market conditions that are not considered to be credit-related issues. The Company is continuing to receive timely principal and interest payments on its municipal securities and the majority of these issuers have revenues pledged for payment of debt service prior to payment of other types of expenses. Further, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to their anticipated recovery.
The Company's private label residential MBS are non-agency collateralized mortgage obligations and primarily carry investment grade credit ratings as of June 30, 2020. These securities are secured by pools of residential mortgage loans. Credit losses have not been recognized on these securities as of June 30, 2020 as principal and interest payments on these securities continue to be made on a timely basis, credit support for these securities is considered adequate, and as the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to their anticipated recovery.
The Company's trust preferred securities are investment grade and the issuer continues to make timely principal and interest payments.
Based on the qualitative factors discussed above, no allowance for credit losses for the Company's AFS debt securities has been recognized as of June 30, 2020.
The credit loss model under ASC 326-20, applicable to HTM debt securities, requires recognition of lifetime expected credit losses through an allowance account at the time the security is purchased. The following tables present a rollforward by major security type of the allowance for credit losses for the Company's HTM debt securities:
 
 
Three Months Ended June 30, 2020
 
 
Balance, March 31, 2020
 
Credit Loss Expense
 
Writeoffs
 
Recoveries
 
Balance, June 30, 2020
 
 
(in thousands)
Held-to-maturity debt securities
 
 
 
 
 
 
 
 
 
 
Tax-exempt
 
$
2,981

 
$
4,668

 
$
—

 
$
—

 
$
7,649

 
 
Six Months Ended June 30, 2020
 
 
Balance, January 1, 2020
 
Credit Loss Expense
 
Writeoffs
 
Recoveries
 
Balance, June 30, 2020
 
 
(in thousands)
Held-to-maturity debt securities
 
 
 
 
 
 
 
 
 
 
Tax-exempt
 
$
2,646

 
$
5,003

 
$
—

 
$
—

 
$
7,649


Accrued interest receivable on HTM securities totaled $1.6 million at June 30, 2020 and is excluded from the estimate of credit losses.

29

The following tables summarize the carrying amount of the Company’s investment ratings position as of June 30, 2020 and December 31, 2019, which are updated quarterly and used to monitor the credit quality of the Company's securities: 
 
 
June 30, 2020
 
 
AAA
 
Split-rated AAA/AA+
 
AA+ to AA-
 
A+ to A-
 
BBB+ to BBB-
 
BB+ and below
 
Unrated
 
Totals
 
 
(in thousands)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
479,380

 
$
479,380

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDO
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
7,302

 
$
—

 
$
7,302

Commercial MBS issued by GSEs
 
—

 
100,410

 
—

 
—

 
—

 
—

 
—

 
100,410

Corporate debt securities
 
—

 
—

 
—

 
60,900

 
32,310

 
—

 
—

 
93,210

Municipal securities
 
—

 
—

 
—

 
2,594

 
—

 
—

 
7,330

 
9,924

Private label residential MBS
 
988,929

 
—

 
18,496

 
92

 
360

 
1,005

 
6,904

 
1,015,786

Residential MBS issued by GSEs
 
—

 
1,340,457

 
—

 
—

 
—

 
—

 
—

 
1,340,457

Tax-exempt
 
43,425

 
22,185

 
519,399

 
309,860

 
—

 
—

 
32,075

 
926,944

Trust preferred securities
 
—

 
—

 
—

 
—

 
22,889

 
—

 
—

 
22,889

Total AFS securities (1)
 
$
1,032,354

 
$
1,463,052

 
$
537,895

 
$
373,446

 
$
55,559

 
$
8,307

 
$
46,309

 
$
3,516,922

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRA investments
 
$
—

 
$
27,681

 
$
—

 
$
—

 
$
—

 
$
—

 
$
28,750

 
$
56,431

Preferred stock
 
—

 
—

 
—

 
—

 
68,204

 
12,825

 
949

 
81,978

Total equity securities (1)
 
$
—

 
$
27,681

 
$
—

 
$
—

 
$
68,204

 
$
12,825

 
$
29,699

 
$
138,409

(1)Where ratings differ, the Company uses an average of the available ratings by major credit agencies.
 
 
December 31, 2019
 
 
AAA
 
Split-rated AAA/AA+
 
AA+ to AA-
 
A+ to A-
 
BBB+ to BBB-
 
BB+ and below
 
Unrated
 
Totals
 
 
(in thousands)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
485,107

 
$
485,107

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDO
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,142

 
$
—

 
$
10,142

Commercial MBS issued by GSEs
 
—

 
94,253

 
—

 
—

 
—

 
—

 
—

 
94,253

Corporate debt securities
 
—

 
—

 
—

 
66,530

 
33,431

 
—

 
—

 
99,961

Municipal securities
 
—

 
—

 
—

 
—

 
—

 
—

 
7,773

 
7,773

Private label residential MBS
 
1,096,909

 
—

 
30,675

 
181

 
288

 
1,174

 
—

 
1,129,227

Residential MBS issued by GSEs
 
—

 
1,412,060

 
—

 
—

 
—

 
—

 
—

 
1,412,060

Tax-exempt
 
52,610

 
2,856

 
327,657

 
171,732

 
—

 
—

 
—

 
554,855

Trust preferred securities
 
—

 
—

 
—

 
—

 
27,040

 
—

 
—

 
27,040

U.S. government sponsored agency securities
 
—

 
10,000

 
—

 
—

 
—

 
—

 
—

 
10,000

U.S. treasury securities
 
—

 
999

 
—

 
—

 
—

 
—

 
—

 
999

Total AFS securities (1)
 
$
1,149,519

 
$
1,520,168

 
$
358,332

 
$
238,443

 
$
60,759

 
$
11,316

 
$
7,773

 
$
3,346,310

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRA investments
 
$
—

 
$
25,375

 
$
—

 
$
—

 
$
—

 
$
—

 
$
27,129

 
$
52,504

Preferred stock
 
—

 
—

 
—

 
—

 
82,851

 
2,105

 
1,241

 
86,197

Total equity securities (1)
 
$
—

 
$
25,375

 
$
—

 
$
—

 
$
82,851

 
$
2,105

 
$
28,370

 
$
138,701


(1)
Where ratings differ, the Company uses an average of the available ratings by major credit agencies.

30

A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement. As of June 30, 2020, there were no investment securities that were past due. In addition, the Company does not have a significant amount of investment securities on nonaccrual status or securities that are considered to be collateral-dependent as of June 30, 2020.
The amortized cost and fair value of the Company's debt securities as of June 30, 2020, by contractual maturities, are shown below. MBS are shown separately as individual MBS are comprised of pools of loans with varying maturities. Therefore, these securities are listed separately in the maturity summary.
 
 
June 30, 2020
 
 
Amortized Cost
 
Estimated Fair Value
 
 
(in thousands)
Held-to-maturity
 
 
 
 
Due in one year or less
 
$
7,330

 
$
7,361

After one year through five years
 
17,226

 
17,743

After ten years
 
454,824

 
496,762

Total HTM securities
 
$
479,380

 
$
521,866

 
 
 
 
 
Available-for-sale
 
 
 
 
After one year through five years
 
$
6,705

 
$
6,715

After five years through ten years
 
173,884

 
161,998

After ten years
 
849,577

 
891,556

Mortgage-backed securities
 
2,398,229

 
2,456,653

Total AFS securities
 
$
3,428,395

 
$
3,516,922


The following table presents gross gains and losses on sales of investment securities:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
Gross gains
 
$
200

 
$
—

 
$
405

 
$
—

Gross losses
 
(42
)
 
—

 
(175
)
 
—

Net gains (losses) on AFS securities
 
$
158

 
$
—

 
$
230

 
$
—




31

3. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES
On January 1, 2020, the Company adopted the amendments within ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Accordingly, the Company's financial results for reporting periods beginning after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts have not been adjusted and continue to be reported in accordance with legacy GAAP. For a detailed discussion of the impact of adoption of ASU 2016-13 and information related to loans and credit quality, including accounting policies and methodologies used to estimate the allowance for credit losses on loans, see "Note 1. Summary of Significant Accounting Policies."
The Company's primary portfolio segments have changed to align with the methodology applied in estimating the allowance for credit losses under CECL. In addition, as the concept of impaired loans does not exist under CECL, disclosures that related solely to impaired loans have been removed.
The composition of the Company's held for investment loan portfolio is as follows:
 
 
June 30, 2020
 
 
(in thousands)
Commercial and industrial
 


Tech & Innovation
 
$
2,123,722

Other commercial and industrial
 
6,247,269

CRE - owner occupied
 
2,011,321

CRE - non-owner occupied
 


Hotel Franchise Finance
 
1,876,980

Other CRE - non-owned occupied
 
3,434,860

Residential
 
2,349,359

Construction and land development
 
2,168,310

Warehouse lending
 
2,898,736

Municipal & nonprofit
 
1,685,481

Other
 
213,177

Total loans HFI
 
25,009,215

Allowance for credit losses
 
(310,550
)
Total loans HFI, net of allowance
 
$
24,698,665


 
 
December 31, 2019
 
 
(in thousands)
Commercial and industrial
 
$
9,382,043

Commercial real estate - non-owner occupied
 
5,245,634

Commercial real estate - owner occupied
 
2,316,913

Construction and land development
 
1,952,156

Residential real estate
 
2,147,664

Consumer
 
57,083

Loans, net of deferred loan fees and costs
 
21,101,493

Allowance for credit losses
 
(167,797
)
Total loans HFI
 
$
20,933,696


Loans that are held for investment are stated at the amount of unpaid principal, adjusted for net deferred fees and costs, premiums and discounts, purchase accounting fair value adjustments, and an allowance for credit losses. Net deferred loan fees of $80.6 million and $47.7 million reduced the carrying value of loans as of June 30, 2020 and December 31, 2019, respectively. Net unamortized purchase premiums on secondary market loan purchases of $29.7 million and $29.9 million increased the carrying value of loans as of June 30, 2020 and December 31, 2019, respectively.
As of June 30, 2020 and December 31, 2019, the Company also had $20.2 million and $21.8 million of HFS loans, respectively.


32

Nonaccrual and Past Due Loans
Loans are placed on nonaccrual status when management determines that the full repayment of principal and collection of interest according to contractual terms is no longer likely, generally when the loan becomes 90 days or more past due.
The following tables present nonperforming loan balances by loan portfolio segment:
 
 
June 30, 2020
 
 
Nonaccrual with No Allowance for Credit Loss
 
Nonaccrual with an Allowance for Credit Loss
 
Total Nonaccrual
 
Loans Past Due 90 Days or More and Still Accruing
 
 
(in thousands)
Commercial and industrial
 

 

 

 

Tech & Innovation
 
$
19,218

 
$
29,750

 
$
48,968

 
$
—

Other commercial and industrial
 
10,763

 
1,114

 
11,877

 
—

CRE - owner occupied
 
23,185

 
—

 
23,185

 
—

CRE - non-owner occupied
 

 

 

 

Hotel Franchise Finance
 
—

 
—

 
—

 
—

Other CRE - non-owned occupied
 
16,878

 
11,913

 
28,791

 
—

Residential
 
4,439

 
—

 
4,439

 
—

Construction and land development
 
—

 
—

 
—

 
—

Warehouse lending
 
—

 
—

 
—

 
—

Municipal & nonprofit
 
—

 
2,017

 
2,017

 
—

Other
 
42

 
189

 
231

 
—

Total
 
$
74,525

 
$
44,983

 
$
119,508

 
$
—

In addition, the Company also has HFS loans totaling $20.2 million that are on nonaccrual status as of June 30, 2020.
 
 
December 31, 2019
 
 
Non-accrual loans
 
Loans past due 90 days or more and still accruing
 
 
Current
 
Past Due/
Delinquent
 
Total
Non-accrual
 
 
 
(in thousands)
Commercial and industrial
 
$
19,080

 
$
5,421

 
$
24,501

 
$
—

Commercial real estate
 
 
 
 
 
 
 
 
Owner occupied
 
4,418

 
124

 
4,542

 
—

Non-owner occupied
 
7,265

 
11,913

 
19,178

 
—

Multi-family
 
—

 
—

 
—

 
—

Construction and land development
 
 
 
 
 
 
 
 
Construction
 
2,147

 
—

 
2,147

 
—

Land
 
—

 
—

 
—

 
—

Residential real estate
 
1,231

 
4,369

 
5,600

 
—

Consumer
 
—

 
—

 
—

 
—

Total
 
$
34,141

 
$
21,827

 
$
55,968

 
$
—


The reduction in interest income associated with loans on nonaccrual status was approximately $1.7 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $2.4 million and $0.8 million for the six months ended June 30, 2020 and 2019, respectively.



33

The following table presents an aging analysis of past due loans by loan portfolio segment:
 
 
June 30, 2020
 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Over 90 days
Past Due
 
Total
Past Due
 
Total
 
 
(in thousands)
Commercial and industrial
 


 


 


 


 


 


Tech & Innovation
 
$
2,123,722

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2,123,722

Other commercial and industrial
 
6,245,408

 
1,170

 
467

 
224

 
1,861

 
6,247,269

CRE - owner occupied
 
2,002,781

 
273

 
1,699

 
6,568

 
8,540

 
2,011,321

CRE - non-owner occupied
 


 


 


 


 


 


Hotel Franchise Finance
 
1,876,980

 
—

 
—

 
—

 
—

 
1,876,980

Other CRE - non-owned occupied
 
3,412,562

 
1,997

 
3,959

 
16,342

 
22,298

 
3,434,860

Residential
 
2,340,105

 
5,727

 
1,310

 
2,217

 
9,254

 
2,349,359

Construction and land development
 
2,168,310

 
—

 
—

 
—

 
—

 
2,168,310

Warehouse lending
 
2,898,736

 
—

 
—

 
—

 
—

 
2,898,736

Municipal & nonprofit
 
1,685,481

 
—

 
—

 
—

 
—

 
1,685,481

Other
 
212,926

 
17

 
10

 
224

 
251

 
213,177

Total loans
 
$
24,967,011

 
$
9,184

 
$
7,445

 
$
25,575

 
$
42,204

 
$
25,009,215

 
 
December 31, 2019
 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Over 90 days
Past Due
 
Total
Past Due
 
Total
 
 
(in thousands)
Commercial and industrial
 
$
9,376,377

 
$
2,501

 
$
637

 
$
2,528

 
$
5,666

 
$
9,382,043

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
2,316,165

 
624

 
—

 
124

 
748

 
2,316,913

Non-owner occupied
 
5,007,644

 
4,661

 
—

 
11,913

 
16,574

 
5,024,218

Multi-family
 
221,416

 
—

 
—

 
—

 
—

 
221,416

Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1,176,908

 
—

 
—

 
—

 
—

 
1,176,908

Land
 
775,248

 
—

 
—

 
—

 
—

 
775,248

Residential real estate
 
2,134,346

 
7,627

 
1,721

 
3,970

 
13,318

 
2,147,664

Consumer
 
57,083

 
—

 
—

 
—

 
—

 
57,083

Total loans
 
$
21,065,187

 
$
15,413

 
$
2,358

 
$
18,535

 
$
36,306

 
$
21,101,493




34

Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. This analysis is performed on a quarterly basis. The risk rating categories are described in "Note 1. Summary of Significant Accounting Policies." The following tables present risk ratings as of June 30, 2020 by loan portfolio segment:
 
Term Loan Amortized Cost Basis by Origination Year
 
Revolving Loans Amortized Cost Basis
 
Total
June 30, 2020
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
 
 
(in thousands)
Tech & Innovation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
389,743

 
$
410,375

 
$
144,633

 
$
1,896

 
$
3,629

 
$
—

 
$
1,038,622

 
$
1,988,898

Special mention
11,934

 
12,607

 
2,649

 
—

 
—

 
—

 
—

 
27,190

Substandard
6,963

 
50,659

 
9,968

 
—

 
—

 
—

 
40,044

 
107,634

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
408,640

 
$
473,641

 
$
157,250

 
$
1,896

 
$
3,629

 
$
—

 
$
1,078,666

 
$
2,123,722

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
1,862,888

 
$
1,010,623

 
$
521,064

 
$
366,558

 
$
113,651

 
$
161,821

 
$
2,068,507

 
$
6,105,112

Special mention
5,366

 
18,765

 
5,206

 
24,795

 
16,222

 
39

 
43,174

 
113,567

Substandard
16,860

 
4,610

 
1,859

 
74

 
171

 
373

 
4,457

 
28,404

Doubtful
—

 
—

 
—

 
186

 
—

 
—

 
—

 
186

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
1,885,114

 
$
1,033,998

 
$
528,129

 
$
391,613

 
$
130,044

 
$
162,233

 
$
2,116,138

 
$
6,247,269

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE - owner occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
101,276

 
$
339,065

 
$
345,199

 
$
462,362

 
$
180,255

 
$
407,451

 
$
90,808

 
$
1,926,416

Special mention
1,088

 
9,321

 
2,868

 
7,401

 
5,041

 
8,303

 
124

 
34,146

Substandard
—

 
7,615

 
4,725

 
10,714

 
3,434

 
22,184

 
1,999

 
50,671

Doubtful
—

 
—

 
—

 
—

 
—

 
88

 
—

 
88

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
102,364

 
$
356,001

 
$
352,792

 
$
480,477

 
$
188,730

 
$
438,026

 
$
92,931

 
$
2,011,321

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hotel Franchise Finance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
118,532

 
$
744,904

 
$
456,282

 
$
140,431

 
$
—

 
$
96,244

 
$
162,796

 
$
1,719,189

Special mention
—

 
35,533

 
43,115

 
38,046

 
—

 
23,913

 
—

 
140,607

Substandard
—

 
—

 
—

 
2,194

 
2,129

 
12,861

 
—

 
17,184

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
118,532

 
$
780,437

 
$
499,397

 
$
180,671

 
$
2,129

 
$
133,018

 
$
162,796

 
$
1,876,980

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other CRE - non-owned occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
440,021

 
$
1,083,280

 
$
665,694

 
$
488,734

 
$
194,422

 
$
270,078

 
$
195,142

 
$
3,337,371

Special mention
—

 
27,964

 
7,088

 
—

 
5,233

 
9,632

 
—

 
49,917

Substandard
489

 
6,197

 
—

 
13,689

 
18,529

 
8,668

 
—

 
47,572

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
440,510

 
$
1,117,441

 
$
672,782

 
$
502,423

 
$
218,184

 
$
288,378

 
$
195,142

 
$
3,434,860

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

35

 
Term Loan Amortized Cost Basis by Origination Year
 
Revolving Loans Amortized Cost Basis
 
Total
June 30, 2020
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
 
 
(in thousands)
Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
353,095

 
$
1,099,106

 
$
533,261

 
$
137,590

 
$
109,457

 
$
62,296

 
$
49,363

 
$
2,344,168

Special mention
—

 
—

 
—

 
—

 
—

 
—

 
752

 
752

Substandard
—

 
982

 
167

 
1,558

 
684

 
702

 
346

 
4,439

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
353,095

 
$
1,100,088

 
$
533,428

 
$
139,148

 
$
110,141

 
$
62,998

 
$
50,461

 
$
2,349,359

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
211,150

 
$
735,232

 
$
610,265

 
$
85,817

 
$
1,481

 
$
14,953

 
$
488,604

 
$
2,147,502

Special mention
—

 
8,854

 
2,833

 
—

 
—

 
—

 
8,072

 
19,759

Substandard
—

 
—

 
—

 
1,049

 
—

 
—

 
—

 
1,049

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
211,150

 
$
744,086

 
$
613,098

 
$
86,866

 
$
1,481

 
$
14,953

 
$
496,676

 
$
2,168,310

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warehouse lending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
136,012

 
$
50,389

 
$
59,794

 
$
1,730

 
$
171

 
$
—

 
$
2,650,640

 
$
2,898,736

Special mention
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Substandard
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
136,012

 
$
50,389

 
$
59,794

 
$
1,730

 
$
171

 
$
—

 
$
2,650,640

 
$
2,898,736

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal & nonprofit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
95,805

 
$
164,917

 
$
75,644

 
$
238,800

 
$
134,399

 
$
963,704

 
$
3,536

 
$
1,676,805

Special mention
—

 
4,219

 
2,440

 
—

 
—

 
—

 
—

 
6,659

Substandard
—

 
—

 
—

 
2,017

 
—

 
—

 
—

 
2,017

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
95,805

 
$
169,136

 
$
78,084

 
$
240,817

 
$
134,399

 
$
963,704

 
$
3,536

 
$
1,685,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
13,118

 
$
16,699

 
$
16,726

 
$
7,901

 
$
40,581

 
$
72,634

 
$
33,017

 
$
200,676

Special mention
961

 
—

 
111

 
1,696

 
98

 
26

 
48

 
2,940

Substandard
—

 
137

 
9,192

 
—

 
—

 
212

 
20

 
9,561

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
14,079

 
$
16,836

 
$
26,029

 
$
9,597

 
$
40,679

 
$
72,872

 
$
33,085

 
$
213,177

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total by Risk Category
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
3,721,640

 
$
5,654,590

 
$
3,428,562

 
$
1,931,819

 
$
778,046

 
$
2,049,181

 
$
6,781,035

 
$
24,344,873

Special mention
19,349

 
117,263

 
66,310

 
71,938

 
26,594

 
41,913

 
52,170

 
395,537

Substandard
24,312

 
70,200

 
25,911

 
31,295

 
24,947

 
45,000

 
46,866

 
268,531

Doubtful
—

 
—

 
—

 
186

 
—

 
88

 
—

 
274

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
3,765,301

 
$
5,842,053

 
$
3,520,783

 
$
2,035,238

 
$
829,587

 
$
2,136,182

 
$
6,880,071

 
$
25,009,215


36

 
 
December 31, 2019
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
 
(in thousands)
Commercial and industrial
 
$
9,265,823

 
$
65,893

 
$
49,878

 
$
449

 
$
—

 
$
9,382,043

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
2,265,566

 
9,579

 
41,768

 
—

 
—

 
2,316,913

Non-owner occupied
 
4,913,007

 
64,161

 
47,050

 
—

 
—

 
5,024,218

Multi-family
 
221,416

 
—

 
—

 
—

 
—

 
221,416

Construction and land development
 
 
 
 
 
 
 
 
 
 
Construction
 
1,157,169

 
17,592

 
2,147

 
—

 
—

 
1,176,908

Land
 
773,868

 
1,380

 
—

 
—

 
—

 
775,248

Residential real estate
 
2,141,336

 
366

 
5,962

 
—

 
—

 
2,147,664

Consumer
 
57,073

 
10

 
—

 
—

 
—

 
57,083

Total
 
$
20,795,258

 
$
158,981

 
$
146,805

 
$
449

 
$
—

 
$
21,101,493

 
 
December 31, 2019
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
 
(in thousands)
Current (up to 29 days past due)
 
$
20,785,118

 
$
158,907

 
$
120,897

 
$
265

 
$
—

 
$
21,065,187

Past due 30 - 59 days
 
8,263

 
58

 
7,092

 
—

 
—

 
15,413

Past due 60 - 89 days
 
1,481

 
16

 
861

 
—

 
—

 
2,358

Past due 90 days or more
 
396

 
—

 
17,955

 
184

 
—

 
18,535

Total
 
$
20,795,258

 
$
158,981

 
$
146,805

 
$
449

 
$
—

 
$
21,101,493


Troubled Debt Restructurings
A TDR loan is a loan on which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in the accrued interest, or deferral of interest payments. The majority of the Company's modifications are extensions in terms or deferral of payments which result in no lost principal or interest followed by reductions in interest rates or accrued interest. Consistent with regulatory guidance, a TDR loan that is subsequently modified in another restructuring agreement but has shown sustained performance and classification as a TDR, will be removed from TDR status provided that the modified terms were market-based at the time of modification.
As of June 30, 2020, the Company's TDR loans totaled $36.7 million, two of which were modified during the three and six months ended June 30, 2020, with a recorded investment of $10.8 million. The Company has no allowance allocated to these loans as of June 30, 2020 and has committed to lend additional amounts totaling $0.3 million.
The following table presents information on the financial effects of TDR loans for the periods presented:
 
June 30, 2020
 
Number of Loans
 
Recorded Investment
 
(dollars in thousands)
Commercial and industrial

 

Tech & Innovation
1

 
$
9,968

Other commercial and industrial
3

 
20,211

CRE - owner occupied
3

 
2,261

CRE - non-owner occupied

 

Hotel Franchise Finance
—

 
—

Other CRE - non-owned occupied
1

 
4,304

Total
8

 
$
36,743



37

During the three months ended June 30, 2019, the Company had two new TDR loans with a recorded investment of $1.8 million. During the six months ended June 30, 2019, the Company had four new TDR loans with a recorded investment of $28.9 million. No principal amounts were forgiven and there were no waived fees or other expenses resulting from these TDR loans.
As of December 31, 2019, commitments outstanding on TDR loans totaled $0.2 million.
A TDR loan is deemed to have a payment default when it becomes past due 90 days under the modified terms, goes on nonaccrual status, or is restructured again. Payment defaults, along with other qualitative indicators, are considered by management in the determination of the allowance for credit losses. During the three months ended June 30, 2020, there were no loans for which there was a payment default within 12 months following the modification. During the six months ended June 30, 2020, there was one CRE, owner occupied loan with a recorded investment of $0.7 million for which there was a payment default within 12 months following the modification. There was no increase to the allowance for credit losses or a writeoff that resulted from this TDR redefault during the six months ended June 30, 2020. During the three and six months ended June 30, 2019, there were two TDR loans with a recorded investment of $0.4 million for which there was a payment default.
The CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. The Company is applying this guidance to qualifying loan modifications.
The terms of certain other loans were modified during the three and six months ended June 30, 2020 that did not meet the definition of a TDR. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties prior to the pandemic or a delay in a payment that was considered to be insignificant.
Collateral-Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans as of June 30, 2020:
 
 
June 30, 2020
 
 
Real Estate Collateral
 
Other Collateral
 
Total
 
 
(in thousands)
Commercial and industrial
 

 

 

Tech & Innovation
 
$
—

 
$
86,781

 
$
86,781

Other commercial and industrial
 
—

 
2,105

 
2,105

CRE - owner occupied
 
14,786

 
—

 
14,786

CRE - non-owner occupied
 

 

 

Hotel Franchise Finance
 
17,184

 
—

 
17,184

Other CRE - non-owned occupied
 
16,447

 
—

 
16,447

Residential
 
—

 
—

 
—

Construction and land development
 
1,049

 
—

 
1,049

Warehouse lending
 
—

 
—

 
—

Municipal & nonprofit
 
—

 
—

 
—

Other
 
—

 
7

 
7

Total
 
$
49,466

 
$
88,893

 
$
138,359

The Company did not identify any significant changes in the extent to which collateral secures its collateral dependent loans, whether because of a general deterioration or some other reason during the period ended June 30, 2020.

38

Allowance for Credit Losses
Management considers the level of allowance for credit losses to be a reasonable and supportable estimate of expected credit losses inherent within the Company's loans held for investment portfolio as of June 30, 2020. In addition to the allowance for credit losses, the Company maintains a separate allowance for credit losses related to off-balance sheet credit exposures, including unfunded loan commitments, and this amount is included in other liabilities on the consolidated balance sheets. The Company's allowance for credit losses on unfunded loan commitments totaled $36.3 million and $9.0 million as of June 30, 2020 and December 31, 2019, respectively.
The below tables reflect the activity in the allowance for credit losses for loans held for investment by loan portfolio segment:
 
 
Three Months Ended June 30, 2020
 
 
Balance,
March 31, 2020 (1)
 
Provision
Expense
(Reversal)
 
Writeoffs
 
Recoveries
 
Balance,
June 30, 2020
(1)
 
 
(in thousands)
Commercial and industrial
 

 

 

 

 

Tech & Innovation
 
$
39,756

 
$
17,553

 
$
2,750

 
$
—

 
$
54,559

Other commercial and industrial
 
120,374

 
(9,079
)
 
1,881

 
(516
)
 
109,930

CRE - owner occupied
 
10,557

 
5,070

 
43

 
(3
)
 
15,587

CRE - non-owner occupied
 

 

 

 

 

Hotel Franchise Finance
 
18,828

 
17,036

 
—

 
—

 
35,864

Other CRE - non-owned occupied
 
14,134

 
19,788

 
885

 
365

 
32,672

Residential
 
1,279

 
428

 
—

 
(18
)
 
1,725

Construction and land development
 
7,155

 
28,630

 
—

 
(7
)
 
35,792

Warehouse lending
 
402

 
341

 
—

 
—

 
743

Municipal & nonprofit
 
16,166

 
962

 
—

 
—

 
17,128

Other
 
6,678

 
(44
)
 
164

 
(80
)
 
6,550

Total
 
$
235,329

 
$
80,685

 
$
5,723

 
$
(259
)
 
$
310,550

(1)
Includes an estimate of future recoveries.
 
 
Six Months Ended June 30, 2020
 
 
Balance,
January 1, 2020 (1)
 
Provision
Expense
(Reversal)
 
Writeoffs
 
Recoveries
 
Balance,
June 30, 2020
(1)
 
 
(in thousands)
Commercial and industrial
 

 

 

 

 

Tech & Innovation
 
$
22,394

 
$
34,915

 
$
2,750

 
$
—

 
$
54,559

Other commercial and industrial
 
95,784

 
14,274

 
1,936

 
1,808

 
109,930

CRE - owner occupied
 
10,420

 
5,203

 
43

 
7

 
15,587

CRE - non-owner occupied
 

 

 

 

 

Hotel Franchise Finance
 
14,104

 
21,760

 
—

 
—

 
35,864

Other CRE - non-owned occupied
 
10,503

 
21,488

 
885

 
1,566

 
32,672

Residential
 
3,814

 
(2,119
)
 
—

 
30

 
1,725

Construction and land development
 
6,218

 
29,557

 
—

 
17

 
35,792

Warehouse lending
 
246

 
497

 
—

 
—

 
743

Municipal & nonprofit
 
17,397

 
(269
)
 
—

 
—

 
17,128

Other
 
6,045

 
620

 
206

 
91

 
6,550

Total
 
$
186,925

 
$
125,926

 
$
5,820

 
$
3,519

 
$
310,550

(1)
Includes an estimate of future recoveries.
Accrued interest receivable on loans totaled $107.1 million at June 30, 2020 and is excluded from the estimate of credit losses.

39

 
 
Three Months Ended June 30, 2019
 
 
Balance,
March 31, 2019
 
Charge-offs
 
Recoveries
 
Provision Expense (Reversal)
 
Balance,
June 30, 2019
 
 
(in thousands)
Construction and land development
 
$
26,083

 
$
141

 
$
(9
)
 
$
140

 
$
26,091

Commercial real estate
 
37,867

 
—

 
(439
)
 
2,952

 
41,258

Residential real estate
 
13,006

 
397

 
(27
)
 
(30
)
 
12,606

Commercial and industrial
 
77,254

 
2,018

 
(495
)
 
3,904

 
79,635

Consumer
 
777

 
—

 
(8
)
 
34

 
819

Total
 
$
154,987


$
2,556

 
$
(978
)
 
$
7,000

 
$
160,409

 
 
Six Months Ended June 30, 2019
 
 
Balance,
December 31, 2018
 
Charge-offs
 
Recoveries
 
Provision Expense (Reversal)
 
Balance,
June 30, 2019
 
 
(in thousands)
Construction and land development
 
$
22,513

 
$
141

 
$
(64
)
 
$
3,655

 
$
26,091

Commercial real estate
 
34,829

 
—

 
(892
)
 
5,537

 
41,258

Residential real estate
 
11,276

 
585

 
(120
)
 
1,795

 
12,606

Commercial and industrial
 
83,118

 
4,142

 
(972
)
 
(313
)
 
79,635

Consumer
 
981

 
1

 
(13
)
 
(174
)
 
819

Total
 
$
152,717

 
$
4,869

 
$
(2,061
)
 
$
10,500

 
$
160,409


The following tables disaggregate the Company's allowance for credit losses and loan balance by measurement methodology:
 
 
June 30, 2020
 
 
Loans
 
Allowance
 
 
Collectively Evaluated for Credit Loss
 
Individually Evaluated for Credit Loss
 
Total
 
Collectively Evaluated for Credit Loss
 
Individually Evaluated for Credit Loss
 
Total
 
 
(in thousands)
Commercial and industrial
 

 

 

 

 

 

Tech & Innovation
 
$
2,016,288

 
$
107,434

 
$
2,123,722

 
$
42,559

 
$
12,000

 
$
54,559

Other commercial and industrial
 
6,218,531

 
28,738

 
6,247,269

 
109,616

 
314

 
109,930

CRE - owner occupied
 
1,957,157

 
54,164

 
2,011,321

 
15,587

 
—

 
15,587

CRE - non-owner occupied
 

 

 

 

 

 

Hotel Franchise Finance
 
1,830,081

 
46,899

 
1,876,980

 
33,149

 
2,715

 
35,864

Other CRE - non-owned occupied
 
3,373,639

 
61,221

 
3,434,860

 
31,322

 
1,350

 
32,672

Residential
 
2,344,920

 
4,439

 
2,349,359

 
1,725

 
—

 
1,725

Construction and land development
 
2,167,261

 
1,049

 
2,168,310

 
35,792

 
—

 
35,792

Warehouse lending
 
2,898,736

 
—

 
2,898,736

 
743

 
—

 
743

Municipal & nonprofit
 
1,683,464

 
2,017

 
1,685,481

 
16,686

 
442

 
17,128

Other
 
203,617

 
9,560

 
213,177

 
6,364

 
186

 
6,550

Total
 
$
24,693,694

 
$
315,521

 
$
25,009,215

 
$
293,543

 
$
17,007

 
$
310,550



40

 
 
Commercial Real Estate-Owner Occupied
 
Commercial Real Estate-Non-Owner Occupied
 
Commercial and Industrial
 
Residential Real Estate
 
Construction and Land Development
 
Consumer
 
Total Loans
 
 
(in thousands)
Loans as of December 31, 2019;
 
 
 
 
 
 
 
 
 
 
 
 
Recorded Investment
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with an allowance recorded
 
$
—

 
$
11,913

 
$
6,919

 
$
—

 
$
2,147

 
$
—

 
$
20,979

Impaired loans with no allowance recorded
 
17,736

 
23,625

 
42,065

 
5,600

 
6,274

 
24

 
95,324

Total loans individually evaluated for impairment
 
17,736

 
35,538

 
48,984

 
5,600

 
8,421

 
24

 
116,303

Loans collectively evaluated for impairment
 
2,296,342

 
5,159,921

 
9,333,059

 
2,142,045

 
1,943,735

 
57,059

 
20,932,161

Loans acquired with deteriorated credit quality
 
2,835

 
50,175

 
—

 
19

 
—

 
—

 
53,029

Total recorded investment
 
$
2,316,913

 
$
5,245,634

 
$
9,382,043

 
$
2,147,664

 
$
1,952,156

 
$
57,083

 
$
21,101,493

Unpaid Principal Balance
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with an allowance recorded
 
$
—

 
$
11,949

 
$
9,844

 
$
—

 
$
2,262

 
$
—

 
24,055

Impaired loans with no allowance recorded
 
18,681

 
24,738

 
43,848

 
5,708

 
6,413

 
52

 
99,440

Total loans individually evaluated for impairment
 
18,681

 
36,687

 
53,692

 
5,708

 
8,675

 
52

 
123,495

Loans collectively evaluated for impairment
 
2,297,168

 
5,177,477

 
9,312,100

 
2,113,893

 
1,963,116

 
57,383

 
20,921,137

Loans acquired with deteriorated credit quality
 
3,577

 
60,191

 
—

 
72

 
—

 
—

 
63,840

Total unpaid principal balance
 
$
2,319,426

 
$
5,274,355

 
$
9,365,792

 
$
2,119,673

 
$
1,971,791

 
$
57,435

 
$
21,108,472

Related Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with an allowance recorded
 
$
—

 
$
1,219

 
$
1,050

 
$
—

 
$
507

 
$
—

 
$
2,776

Impaired loans with no allowance recorded
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total loans individually evaluated for impairment
 
—

 
1,219

 
1,050

 
—

 
507

 
—

 
2,776

Loans collectively evaluated for impairment
 
13,842

 
32,114

 
81,252

 
13,714

 
23,387

 
614

 
164,923

Loans acquired with deteriorated credit quality
 
—

 
98

 
—

 
—

 
—

 
—

 
98

Total allowance for credit losses
 
$
13,842

 
$
33,431

 
$
82,302

 
$
13,714

 
$
23,894

 
$
614

 
$
167,797


Loan Purchases and Sales
The following table presents loan purchases by portfolio segment during the three and six months ended June 30, 2020:
 
Three Months Ended June 30, 2020
 
Six Months Ended June 30, 2020
 
(in thousands)
Commercial and industrial
$
123,358

 
$
412,086

Residential
405,748

 
685,198

Warehouse lending
—

 
99,446

Municipal & nonprofit
1,594

 
1,594

Total
$
530,700

 
$
1,198,324

There were no loans purchased with more-than-insignificant deterioration in credit quality during the three and six months ended June 30, 2020. There were no loan sales during the three and six months ended June 30, 2020.

41

The following table presents loan purchases and sales by class during the three and six months ended June 30, 2019.
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
Purchases
 
Sales
 
Purchases
 
Sales
 
(in thousands)
 
(in thousands)
Commercial and industrial
$
338,674

 
$
19,330

 
$
526,665

 
$
34,830

Commercial real estate - non-owner occupied
—

 
—

 
30,034

 
—

Construction and land development
33,882

 
—

 
33,882

 
—

Residential real estate
218,053

 
—

 
530,525

 
—

Total
$
590,609

 
$
19,330

 
$
1,121,106

 
$
34,830

The Company recognized a net loss of $0.1 million and $0.5 million on loan sales during the three and six months ended June 30, 2019, respectively.




42

4. OTHER BORROWINGS
The following table summarizes the Company’s borrowings as of June 30, 2020 and December 31, 2019: 
 
 
June 30, 2020
 
December 31, 2019
 
 
(in thousands)
Short-Term:
 
 
 
 
Federal funds purchased
 
$
—

 
$
—

FHLB advances
 
10,000

 
—

Total short-term borrowings
 
$
10,000

 
$
—


The Company maintains federal fund lines of credit totaling $2.3 billion as of June 30, 2020, which have rates comparable to the federal funds effective rate plus 0.10% to 0.20%. As of June 30, 2020 and December 31, 2019, there were no outstanding balances on the Company's federal fund lines of credit.
The Company also maintains secured lines of credit with the FHLB and the FRB. The Company’s borrowing capacity is determined based on collateral pledged, generally consisting of investment securities and loans, at the time of the borrowing. During the three months ended June 30, 2020, the Company was approved for a PPP lending facility with the FRB that allows the Company to pledge loans originated under the PPP in return for dollar for dollar funding from the FRB, which would provide up to $1.8 billion in additional credit. The amount of available credit under the PPP lending facility will decline each period as these loans are paid down. At June 30, 2020, the Company had no amounts outstanding under its line of credit or its PPP lending facility with the FRB and had $10.0 million in borrowings under its lines of credit with the FHLB. As of June 30, 2020 and December 31, 2019, the Company had additional available credit with the FHLB of approximately $4.4 billion and $4.5 billion, respectively, and with the FRB of approximately $2.3 billion and $1.1 billion, respectively.
Other short-term borrowing sources available to the Company include customer repurchase agreements, which totaled $25.4 million and $16.7 million at June 30, 2020 and December 31, 2019, respectively. The weighted average rate on customer repurchase agreements was 0.19% and 0.15% as of June 30, 2020 and December 31, 2019, respectively.

43

5. QUALIFYING DEBT
Subordinated Debt
The Company's subordinated debt consists of three separate issuances. The Parent issued $175.0 million of subordinated debentures in June 2016, which were recorded net of issuance costs of $5.5 million, and mature July 1, 2056. Beginning on or after July 1, 2021, the Company may redeem the debentures, in whole or in part, at their principal amount plus any accrued and unpaid interest. The debentures have a fixed interest rate of 6.25% per annum.
In June 2015, WAB issued $150.0 million of subordinated debt, which was recorded net of debt issuance costs of $1.8 million, and matures July 15, 2025. The subordinated debt is redeemable by WAB, in whole or in part, on or after July 15, 2020 and on every interest payment date thereafter, for a price equal to the principal amount plus accrued and unpaid interest. The subordinated debt had a fixed interest rate of 5.00% through June 30, 2020, which then converted to a variable rate of 3.20% plus three-month LIBOR through maturity.
In May 2020, WAB issued $225.0 million of subordinated debt, which was recorded net of debt issuance costs of $2.9 million, and matures June 1, 2030. The subordinated debt is redeemable by WAB, in whole or in part, on or after June 1, 2025 and on every interest payment date thereafter, at a redemption price equal to the principal amount plus accrued and unpaid interest. The subordinated debt has a fixed interest rate of 5.25% through June 1, 2025 and then converts to a floating rate per annum equal to the three-month SOFR plus 512 basis points for each quarterly interest period during the floating rate period.
To hedge the interest rate risk on the Company's 2015 and 2016 subordinated debt issuances, the Company entered into fair value interest rate hedges with receive fixed/pay variable swaps.
The carrying value of all subordinated debt issuances, which includes the fair value of the related hedges, totals $547.9 million and $319.2 million at June 30, 2020 and December 31, 2019, respectively.
Junior Subordinated Debt
The Company has formed or acquired through acquisition eight statutory business trusts, which exist for the exclusive purpose of issuing Cumulative Trust Preferred Securities.
With the exception of debt issued by Bridge Capital Trust I and Bridge Capital Trust II, junior subordinated debt is recorded at fair value at each reporting date due to the FVO election made by the Company under ASC 825. The Company did not make the FVO election for the junior subordinated debt acquired as part of the Bridge acquisition. Accordingly, the carrying value of these trusts does not reflect the current fair value of the debt and includes a fair market value adjustment established at acquisition that is being accreted over the remaining life of the trusts.
The carrying value of junior subordinated debt was $69.8 million and $74.4 million as of June 30, 2020 and December 31, 2019, respectively. The weighted average interest rate of all junior subordinated debt as of June 30, 2020 was 2.64%, which is three-month LIBOR plus the contractual spread of 2.34%, compared to a weighted average interest rate of 4.25% at December 31, 2019.
In the event of certain changes or amendments to regulatory requirements or federal tax rules, the debt is redeemable in whole. The obligations under these instruments are fully and unconditionally guaranteed by the Company and rank subordinate and junior in right of payment to all other liabilities of the Company. Based on guidance issued by the FRB, the Company's securities continue to qualify as Tier 1 Capital.

44

6. STOCKHOLDERS' EQUITY
Stock-Based Compensation
Restricted Stock Awards
Restricted stock awards granted to employees generally vest over a 3-year period. Stock grants made to non-employee WAL directors in 2020 were fully vested on July 1, 2020. The Company estimates the compensation cost for stock grants based upon the grant date fair value. Stock compensation expense is recognized on a straight-line basis over the requisite service period for the entire award. The aggregate grant date fair value for the restricted stock awards granted during the three and six months ended June 30, 2020 was $0.6 million and $22.3 million, respectively. Stock compensation expense related to restricted stock awards granted to employees are included in Salaries and employee benefits in the Consolidated Income Statement. For restricted stock awards granted to WAL directors, related stock compensation expense is included in Legal, professional, and directors' fees. For the three and six months ended June 30, 2020, the Company recognized $5.9 million and $10.8 million in stock-based compensation expense related to these stock grants, compared to $5.4 million and $9.7 million for the three and six months ended June 30, 2019.
In addition, the Company previously granted shares of restricted stock to certain members of executive management that had both performance and service conditions that affect vesting. There were no such grants made during the three and six months ended June 30, 2020 and 2019, however expense is still being recognized for a grant made in 2017 with a four-year vesting period. For the three and six months ended June 30, 2020, the Company recognized $0.3 million and $0.6 million in stock-based compensation expense related to these performance-based restricted stock grants, compared to $0.5 million and $1.0 million for the three and six months ended June 30, 2019.
Performance Stock Units
The Company grants performance stock units to members of its executive management that do not vest unless the Company achieves a specified cumulative EPS target and a TSR performance measure over a three-year performance period. The number of shares issued will vary based on the cumulative EPS target and relative TSR performance factor that is achieved. The Company estimates the cost of performance stock units based upon the grant date fair value and expected vesting percentage over the three-year performance period. For the three and six months ended June 30, 2020, the Company recognized $1.8 million and $3.5 million in stock-based compensation expense related to these performance stock units, compared to $1.3 million and $3.0 million for the three and six months ended June 30, 2019.
The three-year performance period for the 2017 grant ended on December 31, 2019, and the Company's cumulative EPS and TSR performance measure for the performance period exceeded the level required for a maximum award under the terms of the grant. As a result, 136,334 shares became fully vested and was distributed to executive management in the first quarter of 2020.
Common Stock Repurchase
The Company's common stock repurchase program was renewed through December 2020, authorizing the Company to repurchase up to $250.0 million of its outstanding common stock. During the three months ended June 30, 2020, the Company temporarily suspended its stock repurchase program. Prior to this decision and pursuant to the repurchase plan, during the three and six months ended June 30, 2020, the Company repurchased 297,000 and 2,066,479 shares of its common stock at a weighted average price of $30.77 and $34.65 for a total payment of $9.1 million and $71.7 million, respectively. During the three and six months ended June 30, 2019, the Company repurchased 792,688 and 1,733,603 shares of its common stock at a weighted average price of $42.81 and $41.45 for a total payment of $34.0 million and $71.9 million, respectively.
Cash Dividend
During the three months ended June 30, 2020, the Company declared and paid a cash dividend of $0.25 per share, for a total dividend payment to shareholders of $25.2 million. During the six months ended June 30, 2020, the Company declared and paid two quarterly cash dividends of $0.25 per share of common stock, totaling $50.8 million.
Treasury Shares
Treasury share purchases represent shares surrendered to the Company equal in value to the statutory payroll tax withholding obligations arising from the vesting of employee restricted stock awards. During the three and six months ended June 30, 2020, the Company purchased treasury shares of 11,055 and 150,166 at a weighted average price of $35.96 and $52.31 per share, respectively. During the three and six months ended June 30, 2019, the Company purchased treasury shares of 3,145 and 176,152 at a weighted average price of $47.16 and $45.69 per share, respectively.

45

7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income by component, net of tax, for the periods indicated: 
 
 
Three Months Ended June 30,
 
 
Unrealized holding gains (losses) on AFS
 
Unrealized holding gains (losses) on SERP
 
Unrealized holding gains (losses) on junior subordinated debt
 
Impairment loss on securities
 
Total
 
 
(in thousands)
Balance, March 31, 2020
 
$
27,621

 
$
(310
)
 
$
10,186

 
$
—

 
$
37,497

Other comprehensive income (loss) before reclassifications
 
39,308

 
(3
)
 
(3,005
)
 
—

 
36,300

Amounts reclassified from AOCI
 
(120
)
 
—

 
—

 
—

 
(120
)
Net current-period other comprehensive income (loss)
 
39,188

 
(3
)
 
(3,005
)
 
—

 
36,180

Balance, June 30, 2020
 
$
66,809

 
$
(313
)
 
$
7,181

 
$
—

 
$
73,677

 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
 
$
(16,214
)
 
$
374

 
$
7,505

 
$
144

 
$
(8,191
)
Other comprehensive income (loss) before reclassifications
 
35,923

 
(17
)
 
(1,334
)
 
—

 
34,572

Amounts reclassified from AOCI
 
—

 
—

 
—

 
—

 
—

Net current-period other comprehensive income (loss)
 
35,923

 
(17
)
 
(1,334
)
 
—

 
34,572

Balance, June 30, 2019
 
$
19,709

 
$
357

 
$
6,171

 
$
144

 
$
26,381

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
Unrealized holding gains (losses) on AFS
 
Unrealized holding gains (losses) on SERP
 
Unrealized holding gains (losses) on junior subordinated debt
 
Impairment loss on securities
 
Total
 
 
(in thousands)
Balance, December 31, 2019
 
$
21,399

 
$
(20
)
 
$
3,629

 
$
—

 
$
25,008

Other comprehensive income (loss) before reclassifications
 
45,584

 
(293
)
 
3,552

 
—

 
48,843

Amounts reclassified from AOCI
 
(174
)
 
—

 
—

 
—

 
(174
)
Net current-period other comprehensive income (loss)
 
45,410

 
(293
)
 
3,552

 
—

 
48,669

Balance, June 30, 2020
 
$
66,809

 
$
(313
)
 
$
7,181

 
$
—

 
$
73,677

 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
$
(47,591
)
 
$
392

 
$
13,433

 
$
144

 
$
(33,622
)
Other comprehensive income (loss) before reclassifications
 
67,300

 
(35
)
 
(7,262
)
 
—

 
60,003

Amounts reclassified from AOCI
 
—

 
—

 
—

 
—

 
—

Net current-period other comprehensive (loss) income
 
67,300

 
(35
)
 
(7,262
)
 
—

 
60,003

Balance, June 30, 2019
 
$
19,709

 
$
357

 
$
6,171

 
$
144

 
$
26,381


The following table presents reclassifications out of accumulated other comprehensive income:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Income Statement Classification
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands)
Gain (loss) on sales of investment securities, net
 
$
158

 
$
—

 
$
230

 
$
—

Income tax (expense) benefit
 
(38
)
 
—

 
(56
)
 
—

Net of tax
 
$
120

 
$
—

 
$
174

 
$
—



46

8. DERIVATIVES AND HEDGING ACTIVITIES
The Company is a party to various derivative instruments. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require a small or no initial investment, and allow for the net settlement of positions. A derivative’s notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. A derivative’s underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index, or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract.
The primary type of derivatives that the Company uses are interest rate swaps. Generally, these instruments are used to help manage the Company's exposure to interest rate risk and meet client financing and hedging needs.
Derivatives are recorded at fair value on the Consolidated Balance Sheets, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow the Company to settle all derivative contracts held with the same counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable.
As of June 30, 2020, December 31, 2019, and June 30, 2019, the Company does not have any outstanding cash flow hedges.
Derivatives Designated in Hedge Relationships
The Company utilizes derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to minimize the exposure to changes in benchmark interest rates and volatility of net interest income and EVE to interest rate fluctuations. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) from either a fixed rate to a floating rate, or from a floating rate to a fixed rate.
The Company has entered into pay fixed/receive variable interest rate swaps designated as fair value hedges of certain fixed rate loans. As a result, the Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts.
The Company has also entered into receive fixed/pay variable interest rate swaps, designated as fair value hedges on its fixed rate subordinated debt offerings. As a result, the Company is paying a floating rate of three-month LIBOR plus 3.16% and is receiving semi-annual fixed payments of 5.00% to match the payments on the $150.0 million subordinated debt. For the fair value hedge on the Parent's $175.0 million subordinated debentures issued on June 16, 2016, the Company is paying a floating rate of three-month LIBOR plus 3.25% and is receiving quarterly fixed payments of 6.25% to match the payments on the debt.
Derivatives Not Designated in Hedge Relationships

Management also enters into certain foreign exchange derivative contracts and back-to-back interest rate swaps which are not designated as accounting hedges. Foreign exchange derivative contracts include spot, forward, forward window, and swap contracts. The purpose of these derivative contracts is to mitigate foreign currency risk on transactions entered into, or on behalf of customers. Contracts with customers, along with the related derivative trades that the Company places, are both remeasured at fair value, and are referred to as economic hedges since they economically offset the Company's exposure. The Company's back-to-back interest rate swaps are used to manage long-term interest rate risk.

Fair Value Hedges

As of June 30, 2020 and December 31, 2019, the following amounts are reflected on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:

 
 
June 30, 2020
 
December 31, 2019
 
 
Carrying Value of Hedged Assets/(Liabilities)
 
Cumulative Fair Value Hedging Adjustment (1)
 
Carrying Value of Hedged Assets/(Liabilities)
 
Cumulative Fair Value Hedging Adjustment (1)
 
 
(in thousands)
Loans - HFI, net of deferred loan fees and costs
 
$
619,833

 
$
101,315

 
$
578,063

 
$
53,292

Qualifying debt
 
(325,826
)
 
(5,966
)
 
(319,197
)
 
401

(1)
Included in the carrying value of the hedged assets/(liabilities).


47

For the Company's derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings in the same line item as the offsetting loss or gain on the related interest rate swaps. For loans, the gain or loss on the hedged item is included in interest income and for subordinated debt, the gain or loss on the hedged item is included in interest expense.
Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of the Company's derivative instruments on a gross and net basis as of June 30, 2020, December 31, 2019, and June 30, 2019. The change in the notional amounts of these derivatives from June 30, 2019 to June 30, 2020 indicates the volume of the Company's derivative transaction activity during these periods. The derivative asset and liability balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow the Company to settle all derivative contracts with the same counterparty on a net basis and to offset the net derivative position with the related collateral. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, the Company does not adjust those derivative amounts with counterparties. The fair value of derivative contracts, after taking into account the effects of master netting agreements, is included in other assets or other liabilities on the Consolidated Balance Sheets, as indicated in the following table:
 
June 30, 2020
 
December 31, 2019
 
June 30, 2019
 
 
 
Fair Value
 
 
 
Fair Value
 
 
 
Fair Value
 
Notional
Amount
 
Derivative Assets
 
Derivative Liabilities
 
Notional
Amount
 
Derivative Assets
 
Derivative Liabilities
 
Notional
Amount
 
Derivative Assets
 
Derivative Liabilities
 
(in thousands)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
856,948

 
$
5,966

 
$
101,315

 
$
862,952

 
$
1,778

 
$
55,471

 
$
958,298

 
$
1,436

 
$
62,754

Total
856,948

 
5,966

 
101,315

 
862,952

 
1,778

 
55,471

 
958,298

 
1,436

 
62,754

Netting adjustments (1)
—

 
—

 
—

 
—

 
21

 
21

 
—

 
163

 
163

Net derivatives in the balance sheet
$
856,948

 
$
5,966

 
$
101,315

 
$
862,952

 
$
1,757

 
$
55,450

 
$
958,298

 
$
1,273

 
$
62,591

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
24,949

 
$
293

 
$
262

 
$
6,711

 
$
44

 
$
18

 
$
25,151

 
$
263

 
$
147

Interest rate swaps
2,932

 
249

 
249

 
2,932

 
81

 
81

 
2,348

 
83

 
83

Total
$
27,881

 
$
542

 
$
511

 
$
9,643

 
$
125

 
$
99

 
$
27,499

 
$
346

 
$
230

(1)
Netting adjustments represent the amounts recorded to convert the Company's derivative balances from a gross basis to a net basis in accordance with the applicable accounting guidance.
Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected replacement value of the contracts. Management enters into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with the same counterparty. Additionally, management monitors counterparty credit risk exposure on each contract to determine appropriate limits on the Company's total credit exposure across all product types, which may require the Company to post collateral to counterparties when these contracts are in a net liability position and conversely, for counterparties to post collateral to the Company when these contracts are in a net asset position. In general, the Company has a zero credit threshold with regard to derivative exposure with counterparties. Management reviews the Company's collateral positions on a daily basis and exchanges collateral with counterparties in accordance with standard ISDA documentation and other related agreements. The Company generally posts or holds collateral in the form of cash deposits or highly rated securities issued by the U.S. Treasury or government-sponsored enterprises, such as GNMA, FNMA, and FHLMC. The total collateral pledged by the Company to counterparties exceeded its net derivative liabilities as of June 30, 2020, December 31, 2019, and June 30, 2019, resulting in excess collateral postings of $15.9 million, $29.2 million and $20.3 million, respectively.

48

The following table summarizes the Company's largest exposure to an individual counterparty at the dates indicated:
 
 
June 30, 2020
 
December 31, 2019
 
June 30, 2019
 
 
(in thousands)
Largest gross exposure (derivative asset) to an individual counterparty
 
$
3,874

 
$
1,757

 
$
1,273

Collateral posted by this counterparty
 
—

 
1,610

 
1,100

Derivative liability with this counterparty
 
—

 
—

 
—

Collateral pledged to this counterparty
 
—

 
—

 
—

Net exposure after netting adjustments and collateral
 
$
3,874

 
$
147

 
$
173


9. EARNINGS PER SHARE
Diluted EPS is based on the weighted average outstanding common shares during each period, including common stock equivalents. Basic EPS is based on the weighted average outstanding common shares during the period.
The following table presents the calculation of basic and diluted EPS: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands, except per share amounts)
Weighted average shares - basic
 
99,792

 
103,019

 
100,560

 
103,523

Dilutive effect of stock awards
 
201

 
482

 
274

 
462

Weighted average shares - diluted
 
99,993

 
103,501

 
100,834

 
103,985

Net income
 
$
93,272

 
$
122,936

 
$
177,236

 
$
243,732

Earnings per share - basic
 
0.93

 
1.19

 
1.76

 
2.35

Earnings per share - diluted
 
0.93

 
1.19

 
1.76

 
2.34


The Company had no anti-dilutive stock options outstanding at each of the periods ended June 30, 2020 and 2019.

49

10. INCOME TAXES  
The Company's effective tax rate was 17.36% and 16.76% for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, the Company's effective tax rate was 17.70% and 17.10%, respectively. The increase in the effective tax rate from the three and six months ended June 30, 2019 is due primarily to tax expense associated with a surrender of bank owned life insurance and increased state tax accruals, partially offset by increases in forecasted tax-exempt income and investment tax credits in 2020.
As of June 30, 2020, the net deferred tax asset was $34.1 million, an increase of $16.0 million from December 31, 2019. This overall increase in the net deferred tax asset was primarily the result of an increase in the allowance for credit losses under the new CECL accounting guidance, which upon adoption on January 1, 2020, increased the deferred tax asset by $8.7 million. For a detailed discussion of the impact of adoption, see "Note 1. Summary of Significant Accounting Policies."
Although realization is not assured, the Company believes that the realization of the recognized deferred tax asset of $34.1 million at June 30, 2020 is more-likely-than-not based on expectations as to future taxable income and based on available tax planning strategies that could be implemented if necessary to prevent a carryover from expiring.
At June 30, 2020 and December 31, 2019, the Company had no deferred tax valuation allowance.
As of June 30, 2020, the Company’s gross federal NOL carryovers after current year-to-date utilization, all of which are subject to limitations under Section 382 of the IRC, totaled approximately $45.1 million for which a deferred tax asset of $5.3 million has been recorded, reflecting the expected benefit of these remaining federal NOL carryovers. The Company also has varying gross amounts of state NOL carryovers, with the most significant in Arizona. The gross Arizona NOL carryovers totaled approximately $1.3 million. A deferred tax asset balance of $0.1 million as of June 30, 2020 has been recorded to reflect the expected benefit of all remaining state NOL carryovers.
LIHTC and renewable energy projects
The Company holds ownership interests in limited partnerships and limited liability companies that invest in affordable housing and renewable energy projects. These investments are designed to generate a return primarily through the realization of federal tax credits and deductions. The limited liability entities are considered to be VIEs; however, as a limited partner, the Company is not the primary beneficiary and is not required to consolidate these entities.
Investments in LIHTC and renewable energy total $438.1 million and $409.4 million as of June 30, 2020 and December 31, 2019, respectively. Unfunded LIHTC and renewable energy obligations are included as part of other liabilities on the Consolidated Balance Sheets and total $201.9 million and $191.0 million as of June 30, 2020 and December 31, 2019, respectively. For the three months ended June 30, 2020 and 2019, $12.3 million and $10.5 million, respectively, of amortization related to LIHTC investments was recognized as a component of income tax expense. For the six months ended June 30, 2020 and 2019, $19.7 million and $20.6 million, respectively, of amortization related to LIHTC investments was recognized as a component of income tax expense.
11. COMMITMENTS AND CONTINGENCIES
Unfunded Commitments and Letters of Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the Consolidated Balance Sheets.
Lines of credit are obligations to lend money to a borrower. Credit risk arises when the borrower's current financial condition may indicate less ability to pay than when the commitment was originally made. In the case of letters of credit, the risk arises from the potential failure of the customer to perform according to the terms of a contract. In such a situation, the third party might draw on the letter of credit to pay for completion of the contract and the Company would look to its customer to repay these funds with interest. To minimize the risk, the Company uses the same credit policies in making commitments and conditional obligations as it would for a loan to that customer.
Letters of credit and financial guarantees are commitments issued by the Company to guarantee the performance of a customer to a third party in borrowing arrangements. The Company generally has recourse to recover from the customer any amounts paid under the guarantees. Typically, letters of credit issued have expiration dates within one year.

50

A summary of the contractual amounts for unfunded commitments and letters of credit are as follows: 
 
 
June 30, 2020
 
December 31, 2019
 
 
(in thousands)
Commitments to extend credit, including unsecured loan commitments of $1,052,300 at June 30, 2020 and $895,175 at December 31, 2019
 
$
7,835,737

 
$
8,348,421

Credit card commitments and financial guarantees
 
284,153

 
302,909

Letters of credit, including unsecured letters of credit of $7,028 at June 30, 2020 and $5,850 at December 31, 2019
 
152,764

 
175,778

Total
 
$
8,272,654

 
$
8,827,108


Commitments to extend credit are agreements to lend to a customer provided that there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
The Company has exposure to credit losses from unfunded commitments and letters of credit. As funds have not been disbursed on these commitments, they are not reported as loans outstanding. Credit losses related to these commitments are included in other liabilities as a separate loss contingency and are not included in the allowance for credit losses reported in "Note 3. Loans, Leases and Allowance for Credit Losses" of these Unaudited Consolidated Financial Statements. This loss contingency for unfunded loan commitments and letters of credit was $36.3 million and $9.0 million as of June 30, 2020 and December 31, 2019, respectively. Changes to this liability are adjusted through the provision for credit losses in the Consolidated Income Statement. In addition, upon adoption of ASU 2016-13 on January 1, 2020, the Company recorded an increase of $15.1 million to this liability, which was recorded as an adjustment to retained earnings, net of tax.
Concentrations of Lending Activities
The Company’s lending activities are driven in large part by the customers served in the market areas where the Company has branch offices in the states of Arizona, Nevada, and California. Despite the geographic concentration of lending activities, the Company does not have a single external customer from which it derives 10% or more of its revenues. The Company monitors concentrations within four broad categories: geography, industry, product, and collateral. The Company's loan portfolio includes significant credit exposure to the CRE market. As of each of the periods ended June 30, 2020 and December 31, 2019, CRE related loans accounted for approximately 39% and 45% of total loans, respectively. Substantially all of these loans are secured by first liens with an initial loan-to-value ratio of generally not more than 75%. Approximately 30% and 31% of these CRE loans, excluding construction and land loans, were owner-occupied at June 30, 2020 and December 31, 2019, respectively.
Contingencies
The Company is involved in various lawsuits of a routine nature that are being handled and defended in the ordinary course of the Company’s business. Expenses are being incurred in connection with these lawsuits, but in the opinion of management, based in part on consultation with outside legal counsel, the resolution of these lawsuits and associated defense costs will not have a material impact on the Company’s financial position, results of operations, or cash flows.
Lease Commitments
The Company has operating leases under which it leases its branch offices, corporate headquarters, other offices, and data facility centers. Operating lease costs totaled $3.5 million and $6.9 million during the three and six months ended June 30, 2020, respectively, compared to $3.1 million and $6.3 million for the three and six months ended June 30, 2019, respectively. Other lease costs, which include common area maintenance, parking, and taxes, and were included as part of occupancy expense, totaled $0.9 million and $2.0 million during the three and six months ended June 30, 2020 and 2019, respectively.

51

12. FAIR VALUE ACCOUNTING
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC 825 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 825 are described in "Note 1. Summary of Significant Accounting Policies" of these Notes to Unaudited Consolidated Financial Statements.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally-developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below.
Under ASC 825, the Company elected the FVO treatment for junior subordinated debt issued by WAL. This election is irrevocable and results in the recognition of unrealized gains and losses on these items at each reporting date. These unrealized gains and losses are recognized as part of other comprehensive income rather than earnings. The Company did not elect FVO treatment for the junior subordinated debt assumed in the Bridge Capital Holdings acquisition.
For the three and six months ended June 30, 2020 and 2019, unrealized gains and losses from fair value changes on junior subordinated debt were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands)
Unrealized (losses)/gains
 
$
(3,984
)
 
$
(1,769
)
 
$
4,711

 
$
(9,631
)
Changes included in OCI, net of tax
 
(3,005
)
 
(1,334
)
 
3,552

 
(7,262
)

Fair value on a recurring basis
Financial assets and financial liabilities measured at fair value on a recurring basis include the following:
AFS securities: Securities classified as AFS are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include quoted prices in active markets, dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things.
Equity securities: Preferred stock and CRA investments are reported at fair value primarily utilizing Level 1 inputs.
Independent pricing service: The Company's independent pricing service provides pricing information on the majority of the Company's Level 1 and Level 2 AFS securities. For a small subset of securities, other pricing sources are used, including observed prices on publicly traded securities and dealer quotes. Management independently evaluates the fair value measurements received from the Company's third-party pricing service through multiple review steps. First, management reviews what has transpired in the marketplace with respect to interest rates, credit spreads, volatility, and mortgage rates, among other things, and develops an expectation of changes to the securities' valuations from the previous quarter. Then, management selects a sample of investment securities and compares the values provided by its primary third-party pricing service to the market values obtained from secondary sources, including other pricing services and safekeeping statements, and evaluates those with notable variances.  In instances where there are discrepancies in pricing from various sources and management expectations, management may manually price

52

securities using currently observed market data to determine whether they can develop similar prices or may utilize bid information from broker dealers. Any remaining discrepancies between management’s review and the prices provided by the vendor are discussed with the vendor and/or the Company’s other valuation advisors.
Interest rate swaps: Interest rate swaps are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations to value its interest rate swaps.
Junior subordinated debt: The Company estimates the fair value of its junior subordinated debt using a discounted cash flow model which incorporates the effect of the Company’s own credit risk in the fair value of the liabilities (Level 3). The Company’s cash flow assumptions are based on contractual cash flows as the Company anticipates that it will pay the debt according to its contractual terms.
The fair value of assets and liabilities measured at fair value on a recurring basis was determined using the following inputs as of the periods presented: 
 
 
Fair Value Measurements at the End of the Reporting Period Using:
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Fair Value
 
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
CDO
 
$
—

 
$
7,302

 
$
—

 
$
7,302

Commercial MBS issued by GSEs
 
—

 
100,410

 
—

 
100,410

Corporate debt securities
 
—

 
93,210

 
—

 
93,210

Municipal securities
 
—

 
9,924

 
—

 
9,924

Private label residential MBS
 
—

 
1,015,786

 
—

 
1,015,786

Residential MBS issued by GSEs
 
—

 
1,340,457

 
—

 
1,340,457

Tax-exempt
 
—

 
926,944

 
—

 
926,944

Trust preferred securities
 
22,889

 
—

 
—

 
22,889

Total AFS debt securities
 
$
22,889

 
$
3,494,033

 
$
—

 
$
3,516,922

Equity securities
 
 
 
 
 
 
 
 
CRA investments
 
$
27,681

 
$
28,750

 
$
—

 
$
56,431

Preferred stock
 
81,978

 
—

 
—

 
81,978

Total equity securities
 
$
109,659

 
$
28,750

 
$
—

 
$
138,409

Loans - HFS
 
$
—

 
$
20,213

 
$
—

 
$
20,213

Derivative assets (1)
 
—

 
6,508

 
—

 
6,508

Liabilities:
 
 
 
 
 
 
 
 
Junior subordinated debt (2)
 
$
—

 
$
—

 
$
56,974

 
$
56,974

Derivative liabilities (1)
 
—

 
101,826

 
—

 
101,826

(1)
Derivative assets and liabilities relate primarily to interest rate swaps, see "Note 8. Derivatives and Hedging Activities." In addition, the carrying value of loans is increased by $101,315 and the net carrying value of subordinated debt is increased by $5,966 as of June 30, 2020 for the effective portion of the hedge, which relates to the fair value of the hedges put in place to mitigate against fluctuations in interest rates.
(2)
Includes only the portion of junior subordinated debt that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.


53

 
 
Fair Value Measurements at the End of the Reporting Period Using:
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Fair Value
 
 
(in thousands)
December 31, 2019
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
CDO
 
$
—

 
$
10,142

 
$
—

 
$
10,142

Commercial MBS issued by GSEs
 
—

 
94,253

 
—

 
94,253

Corporate debt securities
 
5,127

 
94,834

 
—

 
99,961

Municipal securities
 
—

 
7,773

 
—

 
7,773

Private label residential MBS
 
—

 
1,129,227

 
—

 
1,129,227

Residential MBS issued by GSEs
 
—

 
1,412,060

 
—

 
1,412,060

Tax-exempt
 
—

 
554,855

 
—

 
554,855

Trust preferred securities
 
27,040

 
—

 
—

 
27,040

U.S. government sponsored agency securities
 
—

 
10,000

 
—

 
10,000

U.S. treasury securities
 
—

 
999

 
—

 
999

Total AFS debt securities
 
$
32,167

 
$
3,314,143

 
$
—

 
$
3,346,310

Equity securities
 
 
 
 
 
 
 
 
CRA investments
 
$
52,504

 
$
—

 
$
—

 
$
52,504

Preferred stock
 
86,197

 
—

 
—

 
86,197

Total equity securities
 
$
138,701

 
$
—

 
$
—

 
$
138,701

Loans - HFS
 
$
—

 
$
21,803

 
$
—

 
$
21,803

Derivative assets (1)
 
—

 
1,903

 
—

 
1,903

Liabilities:
 
 
 
 
 
 
 
 
Junior subordinated debt (2)
 
$
—

 
$
—

 
$
61,685

 
$
61,685

Derivative liabilities (1)
 
—

 
55,570

 
—

 
55,570

(1)
Derivative assets and liabilities relate primarily to interest rate swaps, see "Note 8. Derivatives and Hedging Activities." In addition, the carrying value of loans is increased by $53,292 and the net carrying value of subordinated debt is decreased by $401 as of December 31, 2019 for the effective portion of the hedge, which relates to the fair value of the hedges put in place to mitigate against fluctuations in interest rates.
(2)
Includes only the portion of junior subordinated debt that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.
For the three and six months ended June 30, 2020 and 2019, the change in Level 3 liabilities measured at fair value on a recurring basis was as follows:
 
 
Junior Subordinated Debt
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands)
Beginning balance
 
$
(52,990
)
 
$
(56,546
)
 
$
(61,685
)
 
$
(48,684
)
Change in fair value (1)
 
(3,984
)
 
(1,769
)
 
4,711

 
(9,631
)
Ending balance
 
$
(56,974
)
 
$
(58,315
)
 
$
(56,974
)
 
$
(58,315
)

(1)
Unrealized gains/(losses) attributable to changes in the fair value of junior subordinated debt are recorded as part of OCI, net of tax, and totaled $(3.0) million and $(1.3) million for three months ended June 30, 2020 and 2019, respectively, and $3.6 million and $(7.3) million for the six months ended June 30, 2020 and 2019, respectively.

54

For Level 3 liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
 
 
June 30, 2020
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input Value
 
 
(in thousands)
 
 
 
 
 
 
Junior subordinated debt
 
$
56,974

 
Discounted cash flow
 
Implied credit rating of the Company
 
4.30
%
 
 
 
December 31, 2019
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input Value
 
 
(in thousands)
 
 
 
 
 
 
Junior subordinated debt
 
$
61,685

 
Discounted cash flow
 
Implied credit rating of the Company
 
5.09
%
The significant unobservable inputs used in the fair value measurement of the Company’s junior subordinated debt as of June 30, 2020 and December 31, 2019 was the implied credit risk for the Company. As of June 30, 2020, the implied credit risk spread was calculated as the difference between the average of the 15-year 'BB' and 'BBB' rated financial indexes over the corresponding swap index. As of December 31, 2019, the implied credit risk spread was calculated as the difference between the 15-year 'BB' rated financial index over the corresponding swap index.
As of June 30, 2020, the Company estimates the discount rate at 4.30%, which represents an implied credit spread of 4.00% plus three-month LIBOR (0.30%). As of December 31, 2019, the Company estimated the discount rate at 5.09%, which was a 3.18% credit spread plus three-month LIBOR (1.91%).

55

Fair value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring basis. That is, the assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of credit deterioration). The following table presents such assets carried on the Balance Sheet by caption and by level within the ASC 825 hierarchy:
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
Total
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Active Markets for Similar Assets
(Level 2)
 
Unobservable Inputs
(Level 3)
 
 
(in thousands)
As of June 30, 2020;
 
 
 
 
 
 
 
 
Loans
 
$
123,404

 
$
—

 
$
—

 
$
123,404

Other assets acquired through foreclosure
 
9,424

 
—

 
—

 
9,424

As of December 31, 2019:
 
 
 
 
 
 
 
 
Loans
 
$
110,272

 
$
—

 
$
—

 
$
110,272

Other assets acquired through foreclosure
 
13,850

 
—

 
—

 
13,850


For Level 3 assets measured at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
 
June 30, 2020
 
Valuation Technique(s)
 
Significant Unobservable Inputs
 
Range
 
(in thousands)
 
 
 
 
 
 
 
 
Loans
$
123,404

 
Collateral method
 
Third party appraisal
 
Costs to sell
 
4.0% to 10.0%
 
Discounted cash flow method
 
Discount rate
 
Contractual loan rate
 
4.0% to 7.0%
Other assets acquired through foreclosure
9,424

 
Collateral method
 
Third party appraisal
 
Costs to sell
 
4.0% to 10.0%
 
December 31, 2019
 
Valuation Technique(s)
 
Significant Unobservable Inputs
 
Range
 
(in thousands)
 
 
 
 
 
 
 
 
Loans
$
110,272

 
Collateral method
 
Third party appraisal
 
Costs to sell
 
4.0% to 10.0%
 
Discounted cash flow method
 
Discount rate
 
Contractual loan rate
 
4.0% to 7.0%
 
 
Scheduled cash collections
 
Probability of default
 
0% to 20.0%
 
 
Proceeds from non-real estate collateral
 
Loss given default
 
0% to 70.0%
Other assets acquired through foreclosure
13,850

 
Collateral method
 
Third party appraisal
 
Costs to sell
 
4.0% to 10.0%

56

Loans: Loans measured at fair value on a nonrecurring basis include collateral dependent loans held for investment. The specific reserves for these loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals or internally-developed discounted cash flow analyses. Appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore qualifying the assets as Level 3 in the fair value hierarchy. In addition, when adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. Internal discounted cash flow analyses are also utilized to estimate the fair value of these loans, which considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity.
Total Level 3 collateral dependent loans had an estimated fair value of $123.4 million and $110.3 million at June 30, 2020 and December 31, 2019, respectively, net of a specific valuation allowance of $15.0 million and $2.8 million at June 30, 2020 and December 31, 2019, respectively.
Other assets acquired through foreclosure: Other assets acquired through foreclosure consist of properties acquired as a result of, or in-lieu-of, foreclosure. These assets are initially reported at the fair value determined by independent appraisals using appraised value less estimated cost to sell. Such properties are generally re-appraised every twelve months. There is risk for subsequent volatility. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to expense.
Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore qualifying the assets as Level 3 in the fair value hierarchy. When significant adjustments are based on unobservable inputs, such as when a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the resulting fair value measurement has been categorized as a Level 3 measurement. The Company had $9.4 million and $13.9 million of such assets at June 30, 2020 and December 31, 2019, respectively.
Fair Value of Financial Instruments
The estimated fair value of the Company’s financial instruments is as follows:
 
 
June 30, 2020
 
 
Carrying Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
HTM
 
$
479,380

 
$
—

 
$
521,866

 
$
—

 
$
521,866

AFS
 
3,516,922

 
22,889

 
3,494,033

 
—

 
3,516,922

Equity
 
138,409

 
109,659

 
28,750

 
—

 
138,409

Derivative assets
 
6,508

 
—

 
6,508

 
—

 
6,508

Loans, net
 
24,718,878

 
—

 
—

 
25,326,371

 
25,326,371

Accrued interest receivable
 
125,999

 
—

 
125,999

 
—

 
125,999

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
27,544,586

 
$
—

 
$
27,556,005

 
$
—

 
$
27,556,005

Customer repurchase agreements
 
25,436

 
—

 
25,436

 
—

 
25,436

Qualifying debt
 
617,729

 
—

 
554,473

 
68,166

 
622,639

Derivative liabilities
 
101,826

 
—

 
101,826

 
—

 
101,826

Accrued interest payable
 
21,161

 
—

 
21,161

 
—

 
21,161



57

 
 
December 31, 2019
 
 
Carrying Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
HTM
 
$
485,107

 
$
—

 
$
516,261

 
$
—

 
$
516,261

AFS
 
3,346,310

 
32,167

 
3,314,143

 
—

 
3,346,310

Equity securities
 
138,701

 
138,701

 
—

 
—

 
138,701

Derivative assets
 
1,903

 
—

 
1,903

 
—

 
1,903

Loans, net
 
20,955,499

 
—

 
—

 
21,256,462

 
21,256,462

Accrued interest receivable
 
108,694

 
—

 
108,694

 
—

 
108,694

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
22,796,493

 
$
—

 
$
22,813,265

 
$
—

 
$
22,813,265

Customer repurchase agreements
 
16,675

 
—

 
16,675

 
—

 
16,675

Qualifying debt
 
393,563

 
—

 
332,635

 
74,155

 
406,790

Derivative liabilities
 
55,570

 
—

 
55,570

 
—

 
55,570

Accrued interest payable
 
24,661

 
—

 
24,661

 
—

 
24,661


Interest rate risk
The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments, as well as its future net interest income, will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.
Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Company's change in EVE and net interest income resulting from hypothetical changes in interest rates. If potential changes to EVE and net interest income resulting from hypothetical interest rate changes are not within the limits established by the BOD, the BOD may direct management to adjust the asset and liability mix to bring interest rate risk within BOD-approved limits.
WAB has an ALCO charged with managing interest rate risk within the BOD-approved limits. Limits are structured to preclude an interest rate risk profile that does not conform to both management and BOD risk tolerances without ALCO approval. There is also ALCO reporting at the Parent level for reviewing interest rate risk for the Company, which gets reported to the BOD and its Finance and Investment Committee.
Fair value of commitments
The estimated fair value of standby letters of credit outstanding at June 30, 2020 and December 31, 2019 approximates zero as there have been no significant changes in borrower creditworthiness. Loan commitments on which the committed interest rates are less than the current market rate are insignificant at June 30, 2020 and December 31, 2019.

58

13. SEGMENTS
The Company's reportable segments are aggregated based primarily on geographic location, services offered, and markets served. The Company's regional segments, which include Arizona, Nevada, Southern California, and Northern California, provide full service banking and related services to their respective markets. The operations from the regional segments correspond to the following banking divisions: ABA in Arizona, BON and FIB in Nevada, TPB in Southern California, and Bridge in Northern California.
The Company's NBL segments provide specialized banking services to niche markets. The Company's NBL reportable segments include HOA Services, Public & Nonprofit Finance, Technology & Innovation, HFF, and Other NBLs. These NBLs are managed centrally and are broader in geographic scope than the Company's other segments, though still predominately located within the Company's core market areas.
The Corporate & Other segment consists of corporate-related items, income and expense items not allocated to the Company's other reportable segments, and inter-segment eliminations.
The Company's segment reporting process begins with the assignment of all loan and deposit accounts directly to the segments where these products are originated and/or serviced. Equity capital is assigned to each segment based on the risk profile of their assets and liabilities. With the exception of goodwill, which is assigned a 100% weighting, equity capital allocations ranged from 0% to 12% during the year, with a funds credit provided for the use of this equity as a funding source. Any excess or deficient equity not allocated to segments based on risk is assigned to the Corporate & Other segment.
Net interest income, provision for credit losses, and non-interest expense amounts are recorded in their respective segment to the extent that the amounts are directly attributable to those segments. Net interest income is recorded in each segment on a TEB with a corresponding increase in income tax expense, which is eliminated in the Corporate & Other segment.
Further, net interest income of a reportable segment includes a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Using this funds transfer pricing methodology, liquidity is transferred between users and providers. A net user of funds has lending/investing in excess of deposits/borrowings and a net provider of funds has deposits/borrowings in excess of lending/investing. A segment that is a user of funds is charged for the use of funds, while a provider of funds is credited through funds transfer pricing, which is determined based on the average life of the assets or liabilities in the portfolio. Residual funds transfer pricing mismatches are allocable to the Corporate & Other segment and presented as part of net interest income.
The net income amount for each reportable segment is further derived by the use of expense allocations. Certain expenses not directly attributable to a specific segment are allocated across all segments based on key metrics, such as number of employees, average loan balances, and average deposit balances. These types of expenses include information technology, operations, human resources, finance, risk management, credit administration, legal, and marketing.
Income taxes are applied to each segment based on the effective tax rate for the geographic location of the segment. Any difference in the corporate tax rate and the aggregate effective tax rates in the segments are adjusted in the Corporate & Other segment.

59

The following is a summary of operating segment information for the periods indicated:
 
 
 
 
Regional Segments
Balance Sheet:
 
Consolidated Company
 
Arizona
 
Nevada
 
Southern California
 
Northern California
At June 30, 2020
 
(in millions)
Assets:
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and investment securities
 
$
5,712.3

 
$
1.6

 
$
15.1

 
$
2.1

 
$
1.9

Loans, net of deferred loan fees and costs
 
25,029.4

 
4,336.7

 
2,688.6

 
2,422.7

 
1,747.9

Less: allowance for credit losses
 
(310.5
)
 
(52.6
)
 
(30.5
)
 
(27.4
)
 
(17.9
)
Total loans
 
24,718.9

 
4,284.1

 
2,658.1

 
2,395.3

 
1,730.0

Other assets acquired through foreclosure, net
 
9.4

 
—

 
9.3

 
—

 
—

Goodwill and other intangible assets, net
 
296.9

 
—

 
23.2

 
—

 
154.2

Other assets
 
1,168.9

 
45.3

 
59.0

 
14.9

 
19.2

Total assets
 
$
31,906.4

 
$
4,331.0

 
$
2,764.7

 
$
2,412.3

 
$
1,905.3

Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
27,544.6

 
$
7,628.7

 
$
4,645.7

 
$
3,023.8

 
$
2,726.1

Borrowings and qualifying debt
 
627.7

 
—

 
—

 
—

 
—

Other liabilities
 
631.7

 
33.1

 
17.9

 
7.2

 
18.6

Total liabilities
 
28,804.0

 
7,661.8

 
4,663.6

 
3,031.0

 
2,744.7

Allocated equity:
 
3,102.4

 
545.8

 
345.8

 
275.3

 
356.9

Total liabilities and stockholders' equity
 
$
31,906.4

 
$
8,207.6

 
$
5,009.4

 
$
3,306.3

 
$
3,101.6

Excess funds provided (used)
 
—

 
3,876.6

 
2,244.7

 
894.0

 
1,196.3

Income Statement:
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2020
 
(in thousands)
Net interest income
 
$
298,400

 
$
80,804

 
$
49,555

 
$
36,302

 
$
31,107

Provision for (recovery of) credit losses
 
92,000

 
30,222

 
12,782

 
15,288

 
6,528

Net interest income after provision for credit losses
 
206,400

 
50,582

 
36,773

 
21,014

 
24,579

Non-interest income
 
21,270

 
1,487

 
2,146

 
890

 
1,678

Non-interest expense
 
(114,799
)
 
(17,159
)
 
(13,514
)
 
(13,762
)
 
(11,907
)
Income (loss) before income taxes
 
112,871

 
34,910

 
25,405

 
8,142

 
14,350

Income tax expense (benefit)
 
19,599

 
8,728

 
5,335

 
2,280

 
4,018

Net income
 
$
93,272

 
$
26,182

 
$
20,070

 
$
5,862

 
$
10,332

Six Months Ended June 30, 2020
 
(in thousands)
Net interest income
 
$
567,420

 
$
146,209

 
$
92,703

 
$
68,692

 
$
56,992

Provision for (recovery of) credit losses
 
143,176

 
36,793

 
16,467

 
18,537

 
10,823

Net interest income after provision for credit losses
 
424,244

 
109,416

 
76,236

 
50,155

 
46,169

Non-interest income
 
26,379

 
3,172

 
4,964

 
2,083

 
4,069

Non-interest expense
 
(235,280
)
 
(41,030
)
 
(28,614
)
 
(29,196
)
 
(25,575
)
Income (loss) before income taxes
 
215,343

 
71,558

 
52,586

 
23,042

 
24,663

Income tax expense (benefit)
 
38,107

 
17,760

 
10,984

 
6,311

 
6,863

Net income
 
$
177,236

 
$
53,798

 
$
41,602

 
$
16,731

 
$
17,800




60

 
 
National Business Lines
 
 
Balance Sheet:
 
HOA
Services
 
Public & Nonprofit Finance
 
Technology & Innovation
 
Hotel Franchise Finance
 
Other NBLs
 
Corporate & Other
At June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
(in millions)
Cash, cash equivalents, and investment securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
32.0

 
$
5,659.6

Loans, net of deferred loan fees and costs
 
274.0

 
1,685.5

 
2,206.7

 
2,043.6

 
7,623.3

 
0.4

Less: allowance for credit losses
 
(2.5
)
 
(17.1
)
 
(57.2
)
 
(39.1
)
 
(66.2
)
 
—

Total loans
 
271.5

 
1,668.4

 
2,149.5

 
2,004.5

 
7,557.1

 
0.4

Other assets acquired through foreclosure, net
 
—

 
—

 
—

 
—

 
0.1

 
—

Goodwill and other intangible assets, net
 
—

 
—

 
119.4

 
0.1

 
—

 
—

Other assets
 
5.7

 
18.3

 
8.7

 
16.6

 
89.3

 
891.9

Total assets
 
$
277.2

 
$
1,686.7

 
$
2,277.6

 
$
2,021.2

 
$
7,678.5

 
$
6,551.9

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
3,675.1

 
$
0.1

 
$
4,416.5

 
$
—

 
$
67.2

 
$
1,361.4

Borrowings and qualifying debt
 
—

 
—

 
—

 
—

 
—

 
627.7

Other liabilities
 
(0.9
)
 
100.6

 
5.1

 
0.2

 
20.2

 
429.7

Total liabilities
 
3,674.2

 
100.7

 
4,421.6

 
0.2

 
87.4

 
2,418.8

Allocated equity:
 
98.2

 
135.2

 
384.7

 
166.7

 
624.3

 
169.5

Total liabilities and stockholders' equity
 
$
3,772.4

 
$
235.9

 
$
4,806.3

 
$
166.9

 
$
711.7

 
$
2,588.3

Excess funds provided (used)
 
3,495.2

 
(1,450.8
)
 
2,528.7

 
(1,854.3
)
 
(6,966.8
)
 
(3,963.6
)
Income Statement:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2020
 
(in thousands)
Net interest income
 
$
22,673

 
$
1,640

 
$
47,749

 
$
13,428

 
$
44,087

 
$
(28,945
)
Provision for (recovery of) credit losses
 
(2,769
)
 
834

 
16,236

 
19,502

 
(11,315
)
 
4,692

Net interest income after provision for credit losses
 
25,442

 
806

 
31,513

 
(6,074
)
 
55,402

 
(33,637
)
Non-interest income
 
91

 
—

 
3,146

 
—

 
569

 
11,263

Non-interest expense
 
(9,371
)
 
(1,537
)
 
(11,383
)
 
(2,322
)
 
(11,441
)
 
(22,403
)
Income (loss) before income taxes
 
16,162

 
(731
)
 
23,276

 
(8,396
)
 
44,530

 
(44,777
)
Income tax expense (benefit)
 
3,717

 
(168
)
 
5,354

 
(1,931
)
 
10,242

 
(17,976
)
Net income
 
$
12,445

 
$
(563
)
 
$
17,922

 
$
(6,465
)
 
$
34,288

 
$
(26,801
)
Six Months Ended June 30, 2020
 
(in thousands)
Net interest income
 
$
45,556

 
$
3,551

 
$
89,423

 
$
26,905

 
$
81,515

 
$
(44,126
)
Provision for (recovery of) credit losses
 
(2,060
)
 
(227
)
 
34,519

 
25,331

 
(2,032
)
 
5,025

Net interest income after provision for credit losses
 
47,616

 
3,778

 
54,904

 
1,574

 
83,547

 
(49,151
)
Non-interest income
 
216

 
—

 
6,121

 
—

 
1,183

 
4,571

Non-interest expense
 
(20,069
)
 
(3,390
)
 
(24,658
)
 
(4,757
)
 
(23,339
)
 
(34,652
)
Income (loss) before income taxes
 
27,763

 
388

 
36,367

 
(3,183
)
 
61,391

 
(79,232
)
Income tax expense (benefit)
 
6,472

 
312

 
8,270

 
(887
)
 
13,912

 
(31,890
)
Net income
 
$
21,291

 
$
76

 
$
28,097

 
$
(2,296
)
 
$
47,479

 
$
(47,342
)






61

 
 
 
 
Regional Segments
Balance Sheet:
 
Consolidated Company
 
Arizona
 
Nevada
 
Southern California
 
Northern California
At December 31, 2019
 
(in millions)
Assets:
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and investment securities
 
$
4,471.2

 
$
1.8

 
$
9.0

 
$
2.3

 
$
2.2

Loans, net of deferred loan fees and costs
 
21,123.3

 
3,847.9

 
2,252.5

 
2,253.9

 
1,311.2

Less: allowance for credit losses
 
(167.8
)
 
(31.6
)
 
(18.0
)
 
(18.3
)
 
(9.7
)
Total loans
 
20,955.5

 
3,816.3

 
2,234.5

 
2,235.6

 
1,301.5

Other assets acquired through foreclosure, net
 
13.9

 
—

 
13.0

 
0.9

 
—

Goodwill and other intangible assets, net
 
297.6

 
—

 
23.2

 
—

 
154.6

Other assets
 
1,083.7

 
48.6

 
59.4

 
15.0

 
19.8

Total assets
 
$
26,821.9

 
$
3,866.7

 
$
2,339.1

 
$
2,253.8

 
$
1,478.1

Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
22,796.5

 
$
5,384.7

 
$
4,350.1

 
$
2,585.3

 
$
2,373.6

Borrowings and qualifying debt
 
393.6

 
—

 
—

 
—

 
—

Other liabilities
 
615.1

 
17.8

 
11.9

 
1.2

 
15.9

Total liabilities
 
23,805.2

 
5,402.5

 
4,362.0

 
2,586.5

 
2,389.5

Allocated equity:
 
3,016.7

 
453.6

 
301.0

 
253.3

 
312.5

Total liabilities and stockholders' equity
 
$
26,821.9

 
$
5,856.1

 
$
4,663.0

 
$
2,839.8

 
$
2,702.0

Excess funds provided (used)
 
—

 
1,989.4

 
2,323.9

 
586.0

 
1,223.9

Income Statement:
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
 
(in thousands)
Net interest income
 
$
254,681

 
$
59,719

 
$
39,528

 
$
31,644

 
$
23,996

Provision for (recovery of) credit losses
 
6,964

 
1,443

 
(305
)
 
67

 
(152
)
Net interest income (expense) after provision for credit losses
 
247,717

 
58,276

 
39,833

 
31,577

 
24,148

Non-interest income
 
14,218

 
1,707

 
2,677

 
974

 
2,162

Non-interest expense
 
(114,249
)
 
(22,693
)
 
(14,107
)
 
(15,122
)
 
(12,549
)
Income (loss) before income taxes
 
147,686

 
37,290

 
28,403

 
17,429

 
13,761

Income tax expense (benefit)
 
24,750

 
9,322

 
5,965

 
4,880

 
3,853

Net income
 
$
122,936

 
$
27,968

 
$
22,438

 
$
12,549

 
$
9,908

Six Months Ended June 30, 2019
 
(in thousands)
Net interest income
 
$
502,017

 
$
114,945

 
$
78,626

 
$
62,120

 
$
47,029

Provision for (recovery of) credit losses
 
11,500

 
1,604

 
228

 
800

 
(871
)
Net interest income (expense) after provision for credit losses
 
490,517

 
113,341

 
78,398

 
61,320

 
47,900

Non-interest income
 
29,628

 
3,229

 
5,250

 
1,975

 
4,382

Non-interest expense
 
(226,127
)
 
(44,943
)
 
(29,888
)
 
(29,704
)
 
(26,040
)
Income (loss) before income taxes
 
294,018

 
71,627

 
53,760

 
33,591

 
26,242

Income tax expense (benefit)
 
50,286

 
17,907

 
11,289

 
9,406

 
7,348

Net income
 
$
243,732

 
$
53,720

 
$
42,471

 
$
24,185

 
$
18,894



62

 
 
National Business Lines
 
 
Balance Sheet:
 
HOA
Services
 
Public & Nonprofit Finance
 
Technology & Innovation
 
Hotel Franchise Finance
 
Other NBLs
 
Corporate & Other
At December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
(in millions)
Cash, cash equivalents, and investment securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
10.1

 
$
4,445.8

Loans, net of deferred loan fees and costs
 
237.2

 
1,635.6

 
1,552.0

 
1,930.8

 
6,098.7

 
3.5

Less: allowance for credit losses
 
(2.0
)
 
(13.7
)
 
(12.6
)
 
(12.6
)
 
(49.3
)
 
—

Total loans
 
235.2

 
1,621.9

 
1,539.4

 
1,918.2

 
6,049.4

 
3.5

Other assets acquired through foreclosure, net
 
—

 
—

 
—

 
—

 
—

 
—

Goodwill and other intangible assets, net
 
—

 
—

 
119.7

 
0.1

 
—

 
—

Other assets
 
1.2

 
18.3

 
7.3

 
8.8

 
64.3

 
841.0

Total assets
 
$
236.4

 
$
1,640.2

 
$
1,666.4

 
$
1,927.1

 
$
6,123.8

 
$
5,290.3

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
3,210.1

 
$
0.1

 
$
3,771.5

 
$
—

 
$
36.9

 
$
1,084.2

Borrowings and qualifying debt
 
—

 
—

 
—

 
—

 
—

 
393.6

Other liabilities
 
1.8

 
52.9

 
0.1

 
—

 
2.8

 
510.7

Total liabilities
 
3,211.9

 
53.0

 
3,771.6

 
—

 
39.7

 
1,988.5

Allocated equity:
 
84.5

 
131.6

 
317.5

 
158.5

 
494.3

 
509.9

Total liabilities and stockholders' equity
 
$
3,296.4

 
$
184.6

 
$
4,089.1

 
$
158.5

 
$
534.0

 
$
2,498.4

Excess funds provided (used)
 
3,060.0

 
(1,455.6
)
 
2,422.7

 
(1,768.6
)
 
(5,589.8
)
 
(2,791.9
)

Income Statement:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
 
(in thousands)
Net interest income (expense)
 
$
21,905

 
$
3,461

 
$
28,536

 
$
13,490

 
$
29,586

 
$
2,816

Provision for (recovery of) credit losses
 
(7
)
 
96

 
2,657

 
832

 
2,369

 
(36
)
Net interest income (expense) after provision for credit losses
 
21,912

 
3,365

 
25,879

 
12,658

 
27,217

 
2,852

Non-interest income
 
88

 
—

 
2,163

 
—

 
1,549

 
2,898

Non-interest expense
 
(9,549
)
 
(1,931
)
 
(10,015
)
 
(2,162
)
 
(11,073
)
 
(15,048
)
Income (loss) before income taxes
 
12,451

 
1,434

 
18,027

 
10,496

 
17,693

 
(9,298
)
Income tax expense (benefit)
 
2,864

 
330

 
4,146

 
2,414

 
4,069

 
(13,093
)
Net income
 
$
9,587

 
$
1,104

 
$
13,881

 
$
8,082

 
$
13,624

 
$
3,795


Six Months Ended June 30, 2019
 
(in thousands)
Net interest income
 
$
42,546

 
$
6,884

 
$
57,939

 
$
26,434

 
$
55,277

 
$
10,217

Provision for (recovery of) credit losses
 
(33
)
 
55

 
1,739

 
1,631

 
5,347

 
1,000

Net interest income (expense) after provision for credit losses
 
42,579

 
6,829

 
56,200

 
24,803

 
49,930

 
9,217

Non-interest income
 
184

 
—

 
5,525

 
—

 
2,207

 
6,876

Non-interest expense
 
(18,008
)
 
(3,838
)
 
(21,903
)
 
(4,560
)
 
(20,409
)
 
(26,834
)
Income (loss) before income taxes
 
24,755

 
2,991

 
39,822

 
20,243

 
31,728

 
(10,741
)
Income tax expense (benefit)
 
5,694

 
688

 
9,159

 
4,656

 
7,297

 
(23,158
)
Net income
 
$
19,061

 
$
2,303

 
$
30,663

 
$
15,587

 
$
24,431

 
$
12,417




63

14. REVENUE FROM CONTRACTS WITH CUSTOMERS
ASC 606, Revenue from Contracts with Customers, requires revenue to be recognized at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of the Company’s revenue streams including interest income, credit and debit card fees, income from equity investments including warrants and SBIC equity income, income from bank owned life insurance, foreign currency income, lending related income, and gains and losses on sales of investment securities are outside the scope of ASC 606. Revenue streams including service charges and fees, interchange fees on credit and debit cards, and success fees are within the scope of ASC 606.
Disaggregation of Revenue
The following table represents a disaggregation of revenue from contracts with customers for the periods indicated along with the reportable segment for each revenue category:
 
 
 
 
Regional Segments
 
 
Consolidated Company
 
Arizona
 
Nevada
 
Southern California
 
Northern California
Three Months Ended June 30, 2020
 
(in thousands)
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
$
5,130

 
$
1,076

 
$
1,563

 
$
658

 
$
902

Debit and credit card interchange (1)
 
934

 
244

 
203

 
98

 
381

Success fees (2)
 
251

 
—

 
—

 
—

 
9

Other income
 
66

 
7

 
3

 
(1
)
 
15

Total revenue from contracts with customers
 
$
6,381

 
$
1,327

 
$
1,769

 
$
755

 
$
1,307

Revenues outside the scope of ASC 606 (3)
 
14,889

 
160

 
377

 
135

 
371

Total non-interest income
 
$
21,270

 
$
1,487

 
$
2,146

 
$
890

 
$
1,678

 
 
 
 
Regional Segments
 
 
Consolidated Company
 
Arizona
 
Nevada
 
Southern California
 
Northern California
Six Months Ended June 30, 2020
 
(in thousands)
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
$
11,534

 
$
2,337

 
$
3,747

 
$
1,576

 
$
1,933

Debit and credit card interchange (1)
 
2,344

 
565

 
463

 
233

 
1,068

Success fees (2)
 
386

 
—

 
—

 
—

 
144

Other income
 
161

 
12

 
9

 
(5
)
 
41

Total revenue from contracts with customers
 
$
14,425

 
$
2,914

 
$
4,219

 
$
1,804

 
$
3,186

Revenues outside the scope of ASC 606 (3)
 
11,954

 
258

 
745

 
279

 
883

Total non-interest income
 
$
26,379

 
$
3,172

 
$
4,964

 
$
2,083

 
$
4,069

(1)
Included as part of Card income in the Consolidated Income Statement.
(2)
Included as part of Income from equity investments in the Consolidated Income Statement.
(3)
Amounts are accounted for under separate guidance. Refer to discussion of revenue sources not subject to ASC 606 under the Non-interest income section in "Note 1. Summary of Significant Accounting Policies."


64

 
 
National Business Lines
 
 
 
 
HOA
Services
 
Public & Nonprofit Finance
 
Technology & Innovation
 
Hotel Franchise Finance
 
Other NBLs
 
Corporate & Other
Three Months Ended June 30, 2020
 
(in thousands)
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
$
78

 
$
—

 
$
851

 
$
—

 
$
2

 
$
—

Debit and credit card interchange (1)
 
8

 
—

 
—

 
—

 
—

 
—

Success fees (2)
 
—

 
—

 
242

 
—

 
—

 
—

Other income
 
—

 
—

 
—

 
—

 
41

 
1

Total revenue from contracts with customers
 
$
86

 
$
—

 
$
1,093

 
$
—

 
$
43

 
$
1

Revenues outside the scope of ASC 606 (3)
 
5

 
—

 
2,053

 
—

 
526

 
11,262

Total non-interest income
 
$
91

 
$
—

 
$
3,146

 
$
—

 
$
569

 
$
11,263

 
 
National Business Lines
 
 
 
 
HOA
Services
 
Public & Nonprofit Finance
 
Technology & Innovation
 
Hotel Franchise Finance
 
Other NBLs
 
Corporate & Other
Six Months Ended June 30, 2020
 
(in thousands)
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
$
194

 
$
—

 
$
1,744

 
$
—

 
$
3

 
$
—

Debit and credit card interchange (1)
 
15

 
—

 
—

 
—

 
—

 
—

Success fees (2)
 
—

 
—

 
242

 
—

 
—

 
—

Other income
 
1

 
—

 
—

 
—

 
90

 
13

Total revenue from contracts with customers
 
$
210

 
$
—

 
$
1,986

 
$
—

 
$
93

 
$
13

Revenues outside the scope of ASC 606 (3)
 
6

 
—

 
4,135

 
—

 
1,090

 
4,558

Total non-interest income
 
$
216

 
$
—

 
$
6,121

 
$
—

 
$
1,183

 
$
4,571

(1)
Included as part of Card income in the Consolidated Income Statement.
(2)
Included as part of Income from equity investments in the Consolidated Income Statement.
(3)
Amounts are accounted for under separate guidance. Refer to discussion of revenue sources not subject to ASC 606 under the Non-interest income section in "Note 1. Summary of Significant Accounting Policies."


65

 
 
 
 
Regional Segments
 
 
Consolidated Company
 
Arizona
 
Nevada
 
Southern California
 
Northern California
Three Months Ended June 30, 2019
 
(in thousands)
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
$
5,821

 
$
1,219

 
$
2,031

 
$
722

 
$
967

Debit and credit card interchange (1)
 
1,986

 
337

 
383

 
193

 
1,062

Success fees (2)
 
85

 
—

 
—

 
—

 
—

Other income
 
(14
)
 
(8
)
 
(31
)
 
(6
)
 
(2
)
Total revenue from contracts with customers
 
$
7,878

 
$
1,548

 
$
2,383

 
$
909

 
$
2,027

Revenues outside the scope of ASC 606 (3)
 
6,340

 
159

 
294

 
65

 
135

Total non-interest income
 
$
14,218

 
$
1,707

 
$
2,677

 
$
974

 
$
2,162

 
 
 
 
Regional Segments
 
 
Consolidated Company
 
Arizona
 
Nevada
 
Southern California
 
Northern California
Six Months Ended June 30, 2019
 
(in thousands)
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
$
11,233

 
$
2,298

 
$
3,946

 
$
1,447

 
$
1,857

Debit and credit card interchange (1)
 
3,853

 
675

 
759

 
367

 
2,033

Success fees (2)
 
520

 
—

 
—

 
—

 
—

Other income
 
105

 
1

 
(7
)
 
2

 
23

Total revenue from contracts with customers
 
$
15,711

 
$
2,974

 
$
4,698

 
$
1,816

 
$
3,913

Revenues outside the scope of ASC 606 (3)
 
13,917

 
255

 
552

 
159

 
469

Total non-interest income
 
$
29,628

 
$
3,229

 
$
5,250

 
$
1,975

 
$
4,382

(1)
Included as part of Card income in the Consolidated Income Statement.
(2)
Included as part of Income from equity investments in the Consolidated Income Statement.
(3)
Amounts are accounted for under separate guidance. Refer to discussion of revenue sources not subject to ASC 606 under the Non-interest income section in "Note 1. Summary of Significant Accounting Policies."

66


 
 
National Business Lines
 
 
 
 
HOA
Services
 
Public & Nonprofit Finance
 
Technology & Innovation
 
Hotel Franchise Finance
 
Other NBLs
 
Corporate & Other
Three Months Ended June 30, 2019
 
(in thousands)
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
$
75

 
$
—

 
$
806

 
$
—

 
$
1

 
$
—

Debit and credit card interchange (1)
 
11

 
—

 
—

 
—

 
—

 
—

Success fees (2)
 
—

 
—

 
85

 
—

 
—

 
—

Other income
 
4

 
—

 
4

 
—

 
35

 
(10
)
Total revenue from contracts with customers
 
$
90

 
$
—

 
$
895

 
$
—

 
$
36

 
$
(10
)
Revenues outside the scope of ASC 606 (3)
 
(2
)
 
—

 
1,268

 
—

 
1,513

 
2,908

Total non-interest income
 
$
88

 
$
—

 
$
2,163

 
$
—

 
$
1,549

 
$
2,898

 
 
National Business Lines
 
 
 
 
HOA Services
 
Public & Nonprofit Finance
 
Technology & Innovation
 
Hotel Franchise Finance
 
Other NBLs
 
Corporate & Other
Six Months Ended June 30, 2019
 
(in thousands)
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
$
163

 
$
—

 
$
1,520

 
$
—

 
$
2

 
$
—

Debit and credit card interchange (1)
 
19

 
—

 
—

 
—

 
—

 
—

Success fees (2)
 
—

 
—

 
520

 
—

 
—

 
—

Other income
 
4

 
—

 
4

 
—

 
74

 
4

Total revenue from contracts with customers
 
$
186

 
$
—

 
$
2,044

 
$
—

 
$
76

 
$
4

Revenues outside the scope of ASC 606 (3)
 
(2
)
 
—

 
3,481

 
—

 
2,131

 
6,872

Total non-interest income
 
$
184

 
$
—

 
$
5,525

 
$
—

 
$
2,207

 
$
6,876



(1)
Included as part of Card income in the Consolidated Income Statement.
(2)
Included as part of Income from equity investments in the Consolidated Income Statement.
(3)
Amounts are accounted for under separate guidance. Refer to discussion of revenue sources not subject to ASC 606 under the Non-interest income section in "Note 1. Summary of Significant Accounting Policies."
Performance Obligations
Many of the services the Company performs for its customers are ongoing, and either party may cancel at any time. The fees for these contracts are dependent upon various underlying factors, such as customer deposit balances, and as such may be considered variable. The Company’s performance obligations for these services are satisfied as the services are rendered and payment is collected on a monthly, quarterly, or semi-annual basis. Other contracts with customers are for services to be provided at a point in time, and fees are recognized at the time such services are rendered. The Company had no material unsatisfied performance obligations as of June 30, 2020. The revenue streams within the scope of ASC 606 are described in further detail below.
Service Charges and Fees
The Company performs deposit account services for its customers, which include analysis and treasury management services, use of safe deposit boxes, check upcharges, and other ancillary services. The depository arrangements the Company holds with its customers are considered day-to-day contracts with ongoing renewals and optional purchases, and as such, the contract duration does not extend beyond the services performed. Due to the short-term nature of such contracts, the Company generally recognizes revenue for deposit related fees as services are rendered. From time to time, the Company may waive certain fees for its customers. The Company considers historical experience when recognizing revenue from contracts with customers, and may reduce the transaction price to account for fee waivers or refunds.

67

Debit and Credit Card Interchange
When a credit or debit card issued by the Company is used to purchase goods or services from a merchant, the Company earns an interchange fee. The Company considers the merchant its customer in these transactions as the Company provides the merchant with the service of enabling the cardholder to purchase the merchant’s goods or services with increased convenience, and it enables the merchants to transact with a class of customer that may not have access to sufficient funds at the time of purchase. The Company acts as an agent to the payment network by providing nightly settlement services between the network and the merchant. This transmission of data and funds represents the Company’s performance obligation and is performed nightly. As the payment network is in direct control of setting the rates and the Company is acting as an agent, the interchange fee is recorded net of expenses as the services are provided.
Success Fees
Success fees are one-time fees detailed as part of certain loan agreements and are earned immediately upon occurrence of a triggering event. Examples of triggering events include: a borrower obtaining its next round of funding, an acquisition, or completion of a public offering. Success fees are variable consideration as the transaction price can vary and is contingent on the occurrence or non-occurrence of a future event. As the consideration is highly susceptible to factors outside of the Company’s influence and uncertainty about the amount of consideration is not expected to be resolved for an extended period of time, the variable consideration is constrained and is not recognized until the achievement of the triggering event.
Principal versus Agent Considerations
When more than one party is involved in providing goods or services to a customer, ASC 606 requires the Company to determine whether it is the principal or an agent in these transactions by evaluating the nature of its promise to the customer. An entity is a principal and therefore records revenue on a gross basis, if it controls a promised good or service before transferring that good or service to the customer. An entity is an agent and records as revenue the net amount it retains for its agency services if its role is to arrange for another entity to provide the goods or services. The Company most commonly acts as a principal and records revenue on a gross basis, except in certain circumstances. As an example, revenues earned from interchange fees, in which the Company acts as an agent, are recorded as non-interest income, net of the related expenses paid to the principal.
Contract Balances
The timing of revenue recognition may differ from the timing of cash settlements or invoicing to customers. The Company records contract liabilities, or deferred revenue, when payments from customers are received or due in advance of providing services to customers. The Company generally receives payments for its services during the period or at the time services are provided, therefore, does not have material contract liability balances at period-end. The Company records contract assets or receivables when revenue is recognized prior to receipt of cash from the customer. Accounts receivable totals $1.5 million and $1.6 million at each of the periods ended June 30, 2020 and December 31, 2019, respectively, and are presented in Other assets on the Consolidated Balance Sheets.

68

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
This discussion is designed to provide insight into management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources, and interest rate sensitivity. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2019 and the interim Unaudited Consolidated Financial Statements and Notes to Unaudited Consolidated Financial Statements hereto and financial information appearing elsewhere in this report. Unless the context requires otherwise, the terms "Company," "we," and "our" refer to Western Alliance Bancorporation and its wholly-owned subsidiaries on a consolidated basis.
Forward-Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements that are related to or are dependent on estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts.
The forward-looking statements contained in this Form 10-Q reflect the Company's current views about future events and financial performance and involve certain risks, uncertainties, assumptions, and changes in circumstances that may cause the Company's actual results to differ significantly from historical results and those expressed in any forward-looking statement, including those risks discussed under the heading “Risk Factors” in this Form 10-Q. Risks and uncertainties include those set forth in the Company's filings with the SEC and the following factors that could cause actual results to differ materially from those presented: 1) the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto, including legislative or regulatory changes such as the CARES Act; 2) other financial market and economic conditions adversely effecting financial performance; 3) dependency on real estate and events that negatively impact the real estate market; 4) high concentration of commercial real estate and commercial and industrial loans; 5) actual credit losses may exceed expected losses in the loan portfolio; 6) recent changes to FASB accounting standards, including the impact to the Company's allowance and provision for credit losses and capital levels under the new CECL accounting standard; 7) results of any tax audit findings, challenges to the Company's tax positions, or adverse changes or interpretations of tax laws; 8) the geographic concentrations of the Company's assets increase the risks related to local economic conditions; 9) exposure of financial instruments to certain market risks may increase the volatility of earnings and AOCI; 10) dependence on low-cost deposits; 11) ability to borrow from the FHLB or the FRB; 12) perpetration of fraud; 13) information security breaches; 14) reliance on third parties to provide key components of the Company's infrastructure; 15) a change in the Company's creditworthiness; 16) the Company's ability to implement and improve its controls and processes to keep pace with its growth; 17) expansion strategies may not be successful; 18) risks associated with new lines of businesses or new products and services within existing lines of business; 19) the Company's ability to compete in a highly competitive market; 20) the Company's ability to recruit and retain qualified employees and implement adequate succession planning to mitigate the loss of key members of its senior management team; 21) inadequate or ineffective risk management practices and internal controls and procedures; 22) the Company's ability to adapt to technological change; 23) exposure to natural and man-made disasters in markets that the Company operates; 24) risk of operating in a highly regulated industry and the Company's ability to remain in compliance; 25) failure to comply with state and federal banking agency laws and regulations; 26) uncertainty about the future of LIBOR, changes in interest rates, and increased rate competition; 27) exposure to environmental liabilities related to the properties to which the Company acquires title; and 28) risks related to ownership and price of the Company's common stock.
For more information regarding risks that may cause the Company's actual results to differ materially from any forward-looking statements, see “Risk Factors” in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

69

Recent Developments: COVID-19 and the CARES Act
The ongoing COVID-19 global and national health emergency has caused significant disruption in the United States and international economies and financial markets. The spread of COVID-19 in the United States has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Many states, including Arizona, where we are headquartered, and California and Nevada, in which we have significant operations, declared states of emergency. These states, like many others, subsequently moved to a phased reopening, but continue to be significantly impacted by the pandemic.
In response to the COVID-19 pandemic, the CARES Act was signed into law by President Trump on March 27, 2020. The CARES Act provides for approximately $2.2 trillion in emergency economic relief measures including, among other things, loan programs for small and mid-sized businesses and other economic relief for impacted businesses and industries, including financial institutions. Separately, and also in response to COVID-19, the Federal Reserve’s FOMC has set the federal funds target rate - i.e., the interest rate at which depository institutions such as the Bank lend reserve balances to other depository institutions overnight on an uncollateralized basis - to a historic low. On March 16, 2020, the FOMC set the federal funds target rate at 0 to 0.25 percent.
In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act and other recent legislative and regulatory relief efforts are expected to have a material impact on our operations, which are further discussed below.
Financial position and results of operations
The Company's financial position and results of operations as of and for the three and six months ended June 30, 2020 have been significantly impacted by the COVID-19 pandemic. The worsening of forecasted economic conditions from December 31, 2019 to March 31, 2020 and from March 31, 2020 to June 30, 2020 attributable to the pandemic contributed to the $92.0 million and $143.2 million provision for credit losses recognized during the three and six months ended June 30, 2020, respectively, under the new CECL accounting standard adopted by the Company on January 1, 2020. While the Company has not to date experienced significant writeoffs related to the COVID-19 pandemic, the continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the Company’s estimate of its allowance for credit losses and resulting provision for credit losses. To the extent the impact of the pandemic is prolonged and economic conditions continue to worsen or persist longer than forecast, such estimates may be insufficient and may change significantly in the future. The Company’s interest income also may be negatively impacted in future periods as we continue to work with our affected borrowers to defer payments, interest and fees. Additionally, net interest margin may be reduced generally as a result of the low rate environment. These uncertainties and the economic environment will continue to affect earnings, slow growth, and may result in deterioration of asset quality in the Company's loan and investment portfolios. 
The below table details the Company's exposure to borrowers in industries generally considered to be the most impacted by the COVID-19 pandemic:
 
June 30, 2020
 
Business Segment(s)
 
Loan Balance
 
Percent of Total Loan Portfolio
 
 
 
(dollars in millions)
Industry (1):
 
 
 
 
 
Hotel
HFF
 
$
2,043.6

 
8.2
%
Investor dependent
Tech & Innovation
 
1,395.2

 
5.6

Retail (2)
Regional segments
 
675.7

 
2.7

Gaming
Nevada segment
 
508.8

 
2.0

Total
 
 
$
4,623.3

 
18.5
%
(1)
Balances capture credit exposures in the business segments that manage the significant majority of industry relationships.
(2)
Consists of real estate secured loan amounts that have significant retail dependency.
While the Company has not experienced disproportionate impacts among its business segments to date, borrowers in the industries detailed in the table above could have greater sensitivity to the economic downturn with potentially longer recovery periods than other business lines.
Lending operations and accommodations to borrowers
The CARES Act created a new guaranteed, unsecured loan program under the SBA, called the Payroll Protection Program, or the PPP, which the Bank participates in, to fund operational costs of eligible businesses, organizations and self-employed persons during the pandemic period. Nearly $660 billion in funds have been authorized for the PPP, which the SBA has used to guarantee

70

100% of the amounts loaned under the PPP by lenders to eligible small businesses, nonprofits, veterans' organizations, and tribal businesses. One of the notable features of the PPP is that borrowers are eligible for loan forgiveness if borrowers maintain their staff and payroll and if loan amounts are used to cover eligible expenses, such as payroll, mortgage interest, rents and utilities payments. These loans have a two-year term and will earn interest at a rate of 1%. The Company assisted our customers with applications for resources through the program and approved over 4,700 applications. As of June 30, 2020, the outstanding balance of loans originated under the PPP totaled $1.7 billion.
The CARES Act permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a TDR. This includes the following (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration, and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The Company is applying this guidance to qualifying loan modifications and has implemented modifications meeting these conditions on approximately 600 loans, with an outstanding balance of $2.7 billion as of June 30, 2020. We anticipate that short-term modifications related to the impact of COVID-19 will continue to increase. Further, the Company also has granted forbearance requests on approximately 300 residential mortgage loans, with an outstanding balance of $180.0 million as of June 30, 2020.
The MSLP supports lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The MSLP operates through three facilities: the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. The Federal Reserve is currently working to refine the MSLP’s operational infrastructure and facilities and is expected to release further rules and operational guidance. The Bank has registered as a lender under the MSLP and continues to monitor developments related thereto.
Capital and liquidity
While the Company has sufficient capital and does not anticipate any need for additional liquidity in response to the uncertainty regarding the severity and duration of the COVID-19 pandemic, the Company has taken several actions to ensure the strength of its capital and liquidity position. These actions include issuance of $225 million in subordinated debt, establishing a Federal Reserve lending facility in connection with funding loans to small and medium-sized businesses, and temporarily suspending stock repurchases from April 17, 2020 through the end of the second quarter 2020. In addition, the Company is also in a position to pledge additional collateral to increase its borrowing capacity with the FRB, if necessary. Further, management has elected to take advantage of the capital relief option that delays the estimated impact on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay.
Asset valuation
While the Company’s stock price has experienced a recent decline in value, management does not consider this decline to be a triggering event that would indicate that an interim goodwill impairment test was necessary as of June 30, 2020. Continued and sustained declines in the Company's stock price and/or other credit related impacts could give rise to triggering events in the future that could result in a write-down in the value of our goodwill, which could have a material adverse impact on our results of operations.
Our processes, controls and business continuity plan
The Company has focused first on ensuring the well-being of our people, customers, and communities. Preventive health measures were put in place and the majority of employees worked remotely for the majority of the second quarter. The Company also established social distancing precautions for all employees in the office and customers visiting branches, preventive cleaning at offices and branches, and eliminated business-related travel. Near the end of the second quarter, the Company began returning employees to some of our offices pursuant to applicable health and safety procedures and in accordance with guidance from the CDC and local authorities, including regular symptom checks, requiring face cloth coverings in certain areas, increasing physical space between employees, staggering employee shifts and alternating schedules for employees in the workplace, and requiring employees with COVID-19 related symptoms or exposure to quarantine away from the office.
The Company has also concentrated on implementing additional business continuity measures that include establishing a cross-functional COVID-19 team, monitoring potential business interruptions, making improvements to our remote working technology, and conducting regular discussions with our technology vendors. We have not experienced significant disruption to our business as we have been able to facilitate remote work for our employees and have online tools in place for our customers. We believe that we are positioned to continue these business continuity measures for the foreseeable future; however, no assurances can be provided as these circumstances may change depending on the duration of the pandemic.

71

Included at the end of this section are updates to the Supervision and Regulation discussion disclosed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

72

Financial Overview and Highlights
WAL is a bank holding company headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware. WAL provides a full spectrum of deposit, lending, treasury management, international banking, and online banking products and services through its wholly-owned banking subsidiary, WAB.
WAB operates the following full-service banking divisions: ABA, BON and FIB, Bridge, and TPB. The Company also serves business customers through a national platform of specialized financial services.
Financial Results Highlights for the Second Quarter of 2020
•
Net income of $93.3 million, compared to $122.9 million for the second quarter 2019
•
Diluted earnings per share of $0.93, compared to $1.19 per share for the second quarter 2019
•
Total loans of $25.0 billion, up $1.9 billion from March 31, 2020, and $3.9 billion from December 31, 2019
•
Total deposits of $27.5 billion, up $2.7 billion from March 31, 2020, and $4.7 billion from December 31, 2019
•
Net interest margin of 4.19%, compared to 4.59% in the second quarter 2019
•
Net operating revenue of $309.5 million, an increase of 15.8%, or $42.1 million, compared to the second quarter 2019, with operating non-interest expenses flat compared to the second quarter 20191 
•
Operating PPNR of $194.7 million, up 27.7% from $152.5 million in the second quarter 20191 
•
Efficiency ratio of 35.1% in the second quarter 2020, compared to 41.5% in the second quarter 2019
•
Operating efficiency ratio of 36.3% in the second quarter 2020, compared to 42.0% in the second quarter 20191
•
Nonperforming assets (nonaccrual loans and repossessed assets) increased to 0.47% of total assets, from 0.27% at June 30, 2019
•
Annualized net loan charge-offs to average loans outstanding of 0.09%, compared to 0.03% for the second quarter 2019
•
Tangible common equity ratio of 8.9%, compared to 10.2% at June 30, 20191
•
Stockholders' equity of $3.1 billion, an increase of $102.8 million from March 31, 2020 and $85.7 million from December 31, 2019
•
Book value per common share of $30.76, an increase of 11.8% from $27.51 at June 30, 2019
•
Tangible book value per share, net of tax, of $27.84, an increase of $3.19 from $24.65 at June 30, 20191
The impact to the Company from these items, and others of both a positive and negative nature, are discussed in more detail below as they pertain to the Company’s overall comparative performance for the three and six months ended June 30, 2020.

1 See Non-GAAP Financial Measures section beginning on page 74.

73

As a bank holding company, management focuses on key ratios in evaluating the Company's financial condition and results of operations.
Results of Operations and Financial Condition
A summary of the Company's results of operations, financial condition, and selected metrics are included in the following tables: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands, except per share amounts)
Net income
 
$
93,272

 
$
122,936

 
$
177,236

 
$
243,732

Earnings per share - basic
 
0.93

 
1.19

 
1.76

 
2.35

Earnings per share - diluted
 
0.93

 
1.19

 
1.76

 
2.34

Return on average assets
 
1.22
%
 
2.05
%
 
1.22
%
 
2.08
%
Return on average tangible common equity (1)
 
13.60

 
19.72

 
12.89

 
20.10

Net interest margin
 
4.19

 
4.59

 
4.20

 
4.65

(1)
See Non-GAAP Financial Measures section beginning on page 74.
 
 
June 30, 2020
 
December 31, 2019
 
 
(in thousands)
Total assets
 
$
31,906,396

 
$
26,821,948

Total loans, net of deferred loan fees and costs
 
25,029,428

 
21,123,296

Total deposits
 
27,544,586

 
22,796,493

Asset Quality
For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and results of operations. The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans and net charge-offs as a percentage of average loans. Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans. The following table summarizes the Company's key asset quality metrics: 
 
 
June 30, 2020
 
December 31, 2019
 
 
(dollars in thousands)
Non-accrual loans (1)
 
$
139,721

 
$
55,968

Non-performing assets
 
171,004

 
98,174

Non-accrual loans to gross loans
 
0.56
%
 
0.27
%
Net charge-offs to average loans outstanding (2)
 
0.09

 
0.02

(1)
Includes non-accrual HFS loans of $20.2 million and zero at June 30, 2020 and December 31, 2019, respectively.
(2)
Annualized on an actual/actual basis for the three months ended June 30, 2020. Actual year-to-date for the year ended December 31, 2019.
Asset and Deposit Growth
The Company’s assets and liabilities are comprised primarily of loans and deposits. Therefore, the ability to originate new loans and attract new deposits is fundamental to the Company’s growth.
Total assets increased to $31.9 billion at June 30, 2020 from $26.8 billion at December 31, 2019. The increase in total assets of $5.1 billion, or 19.0%, relates primarily to loan growth. Total loans increased by $3.9 billion, or 18.5%, to $25.0 billion as of June 30, 2020, compared to $21.1 billion as of December 31, 2019. The increase in loans from December 31, 2019, which includes $1.7 billion in PPP loans, was driven by commercial and industrial loans of $3.4 billion, with smaller increases in residential real estate, construction and land development, and CRE, non-owner occupied loans of $257.2 million, $245.4 million, and $98.6 million, respetively. These increases were partially offset by a decrease in CRE, owner occupied loans of $59.8 million.
Total deposits increased $4.7 billion, or 20.8%, to $27.5 billion as of June 30, 2020 from $22.8 billion as of December 31, 2019. The increase in deposits from December 31, 2019 was driven by an increase of $3.7 billion in non-interest bearing demand deposits, $747.2 million in interest bearing demand deposits, and $702.5 million in savings and money market accounts. These increases were offset in part by a decrease in certificates of deposit of $399.7 million.

74

RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable periods:
 
 
Three Months Ended June 30,
 
Increase
 
Six Months Ended June 30,
 
Increase
 
 
2020
 
2019
 
(Decrease)
 
2020
 
2019
 
(Decrease)
 
 
(in thousands, except per share amounts)
Consolidated Income Statement Data:
 
 
 
 
Interest income
 
$
318,238

 
$
302,848

 
$
15,390

 
$
625,454

 
$
594,016

 
$
31,438

Interest expense
 
19,838

 
48,167

 
(28,329
)
 
58,034

 
91,999

 
(33,965
)
Net interest income
 
298,400

 
254,681

 
43,719

 
567,420

 
502,017

 
65,403

Provision for credit losses
 
92,000

 
6,964

 
85,036

 
143,176

 
11,500

 
131,676

Net interest income after provision for credit losses
 
206,400

 
247,717

 
(41,317
)
 
424,244

 
490,517

 
(66,273
)
Non-interest income
 
21,270

 
14,218

 
7,052

 
26,379

 
29,628

 
(3,249
)
Non-interest expense
 
114,799

 
114,249

 
550

 
235,280

 
226,127

 
9,153

Income before provision for income taxes
 
112,871

 
147,686

 
(34,815
)
 
215,343

 
294,018

 
(78,675
)
Income tax expense
 
19,599

 
24,750

 
(5,151
)
 
38,107

 
50,286

 
(12,179
)
Net income
 
$
93,272

 
$
122,936

 
$
(29,664
)
 
$
177,236

 
$
243,732

 
$
(66,496
)
Earnings per share - basic
 
$
0.93

 
$
1.19

 
$
(0.26
)
 
$
1.76

 
$
2.35

 
$
(0.59
)
Earnings per share - diluted
 
$
0.93

 
$
1.19

 
$
(0.26
)
 
$
1.76

 
$
2.34

 
$
(0.59
)
Non-GAAP Financial Measures
The following discussion and analysis contains financial information determined by methods other than those prescribed by GAAP. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. These measurements typically adjust GAAP performance measures to exclude the effects of certain significant activities or transactions that, in management's opinion, do not reflect recurring period-to-period comparisons of the Company's performance. Management believes presentation of these non-GAAP financial measures provides useful supplemental information that is essential to a complete understanding of the operating results of the Company's core businesses. Since the presentation of these non-GAAP performance measures and their impact differ between companies, these non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Operating Pre-Provision Net Revenue
Operating PPNR is defined by the Federal Reserve in SR 14-3, which requires companies subject to the rule to project PPNR over the planning horizon for each of the economic scenarios defined annually by the regulators. Banking regulations define PPNR as net interest income plus non-interest income less non-interest expense. Management has further adjusted this metric to exclude any non-recurring or non-operational elements of non-interest income or non-interest expense, which are outlined in the table below. Management believes that this is an important metric as it illustrates the underlying performance of the Company, it enables investors and others to assess the Company's ability to generate capital to cover credit losses through the credit cycle, and provides consistent reporting with a key metric used by bank regulatory agencies.

75

The following table shows the components of operating PPNR for the three and six months ended June 30, 2020 and 2019:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
(in thousands)
Total non-interest income
 
$
21,270

 
$
14,218

 
$
26,379

 
$
29,628

Less:
 
 
 
 
 
 
 
 
Gain (loss) on sales of investment securities, net (1)
 
158

 
—

 
230

 
—

Fair value gain (loss) adjustments on assets measured at fair value, net (1)
 
4,432

 
1,572

 
(6,868
)
 
4,406

Bank owned life insurance enhancement
 
5,607

 
—

 
5,607

 
—

Total operating non-interest income
 
11,073

 
12,646

 
27,410

 
25,222

Plus: net interest income
 
298,400

 
254,681

 
567,420

 
502,017

Net operating revenue
 
$
309,473

 
$
267,327

 
$
594,830

 
$
527,239

Total non-interest expense
 
$
114,799

 
$
114,249

 
$
235,280

 
$
226,127

Less:
 
 
 
 
 
 
 
 
Net (gain) loss on sales / valuations of repossessed and other assets (1)
 
(6
)
 
(620
)
 
(1,458
)
 
(523
)
Total operating non-interest expense
 
$
114,805

 
$
114,869

 
$
236,738

 
$
226,650

Operating pre-provision net revenue
 
$
194,668

 
$
152,458

 
$
358,092

 
$
300,589

Plus:
 
 
 
 
 
 
 
 
Revenue adjustments
 
10,197

 
1,572

 
(1,031
)
 
4,406

Less:
 
 
 
 
 
 
 
 
Provision for credit losses
 
92,000

 
6,964

 
143,176

 
11,500

Expense adjustments
 
(6
)
 
(620
)
 
(1,458
)
 
(523
)
Income before provision for income taxes
 
112,871

 
147,686

 
215,343

 
294,018

Income tax expense
 
19,599

 
24,750

 
38,107

 
50,286

Net income
 
$
93,272

 
$
122,936

 
$
177,236

 
$
243,732

(1)
The operating PPNR non-GAAP performance metric is adjusted to exclude the effects of these non-operational items.
Operating Efficiency Ratio
The following table shows the components used in the calculation of the operating efficiency ratio, which management uses as a metric for assessing cost efficiency:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
 
(dollars in thousands)
Total operating non-interest expense
$
114,805

 
$
114,869

 
$
236,738

 
$
226,650

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Divided by:
 
 
 
 
 
 
 
Total net interest income
$
298,400

 
$
254,681

 
$
567,420

 
$
502,017

Plus:
 
 
 
 
 
 
 
Tax equivalent interest adjustment
6,997

 
6,218

 
13,450

 
12,312

Operating non-interest income
11,073

 
12,646

 
27,410

 
25,222

Net operating revenue - TEB
$
316,470

 
$
273,545

 
$
608,280

 
$
539,551

 
 
 
 
 
 
 
 
Operating efficiency ratio - TEB
36.3
%
 
42.0
%
 
38.9
%
 
42.0
%

76

Tangible Common Equity
The following table presents financial measures related to tangible common equity. Tangible common equity represents total stockholders' equity, less identifiable intangible assets and goodwill. Management believes that tangible common equity financial measures are useful in evaluating the Company's capital strength, financial condition, and ability to manage potential losses. In addition, management believes that these measures improve comparability to other institutions that have not engaged in acquisitions that resulted in recorded goodwill and other intangible assets.
 
June 30, 2020
 
December 31, 2019
 
(dollars and shares in thousands)
Total stockholders' equity
$
3,102,414

 
$
3,016,748

Less: goodwill and intangible assets
296,860

 
297,608

Total tangible stockholders' equity
2,805,554

 
2,719,140

Plus: deferred tax - attributed to intangible assets
1,796

 
1,921

Total tangible common equity, net of tax
$
2,807,350

 
$
2,721,061

 
 
 
 
Total assets
$
31,906,396

 
$
26,821,948

Less: goodwill and intangible assets, net
296,860

 
297,608

Tangible assets
31,609,536

 
26,524,340

Plus: deferred tax - attributed to intangible assets
1,796

 
1,921

Total tangible assets, net of tax
$
31,611,332

 
$
26,526,261

 
 
 
 
Tangible common equity ratio
8.9
%
 
10.3
%
Common shares outstanding
100,849

 
102,524

Book value per share
$
30.76

 
$
29.42

Tangible book value per share, net of tax
27.84

 
26.54


77

Regulatory Capital
The following table presents certain financial measures related to regulatory capital under Basel III, which includes common equity tier 1 and total capital. The FRB and other banking regulators use common equity tier 1 and total capital as a basis for assessing a bank's capital adequacy; therefore, management believes it is useful to assess financial condition and capital adequacy using this same basis. Specifically, the total capital ratio takes into consideration the risk levels of assets and off-balance sheet financial instruments. In addition, management believes that the classified assets to common equity tier 1 plus allowance measure is an important regulatory metric for assessing asset quality.
As permitted by the regulatory capital rules, the Company elected to delay the estimated impact of CECL on its regulatory capital over a five-year transition period ending December 31, 2024. As a result, capital ratios and amounts as of June 30, 2020 exclude the impact of the increased allowance for credit losses related to the adoption of ASC 326.
 
June 30, 2020
 
December 31, 2019
 
(dollars in thousands)
Common equity tier 1:
 
 
 
Common equity
$
3,162,742

 
$
3,016,748

Less:
 
 
 
Non-qualifying goodwill and intangibles
295,064

 
295,607

Disallowed deferred tax asset
283

 
2,243

AOCI related adjustments
66,495

 
21,379

Unrealized gain on changes in fair value liabilities
7,182

 
3,629

Common equity tier 1
$
2,793,718

 
$
2,693,890

Divided by: Risk-weighted assets
$
27,404,507

 
$
25,390,142

Common equity tier 1 ratio
10.2
%
 
10.6
%
 
 
 
 
Common equity tier 1
$
2,793,718

 
$
2,693,890

Plus: Trust preferred securities
81,500

 
81,500

Less:
 
 
 
Disallowed deferred tax asset
—

 
—

Unrealized gain on changes in fair value liabilities
—

 
—

Tier 1 capital
$
2,875,218

 
$
2,775,390

Divided by: Tangible average assets
$
30,343,007

 
$
26,110,275

Tier 1 leverage ratio
9.5
%
 
10.6
%
 
 
 
 
Total capital:
 
 
 
Tier 1 capital
$
2,875,218

 
$
2,775,390

Plus:
 
 
 
Subordinated debt
506,899

 
305,732

Adjusted allowances for credit losses
282,797

 
176,752

Less: Tier 2 qualifying capital deductions
—

 
—

Tier 2 capital
$
789,696

 
$
482,484

Total capital
$
3,664,914

 
$
3,257,874

Total capital ratio
13.4
%
 
12.8
%
 
 
 
 
Classified assets to tier 1 capital plus allowance:
 
 
 
Classified assets
$
298,493

 
$
171,246

Divided by: Tier 1 capital
2,875,218

 
2,775,390

Plus: Adjusted allowances for credit losses
282,797

 
176,752

Total Tier 1 capital plus adjusted allowances for credit losses
$
3,158,015

 
$
2,952,142

Classified assets to tier 1 capital plus allowance (1)
9.5
%
 
5.8
%
(1)
Upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, the allowance for credit losses has been modified to also include amounts related to unfunded loan commitments and investment securities. Prior period amounts have been restated to conform to current presentation.

78

Net Interest Margin
The net interest margin is reported on a TEB. A tax equivalent adjustment is added to reflect interest earned on certain securities and loans that are exempt from federal and state income tax. The following tables set forth the average balances, interest income, interest expense, and average yield (on a fully TEB) for the periods indicated:
 
 
Three Months Ended June 30,
 
 
2020
 
2019
 
 
Average
Balance
 
Interest
 
Average
Yield / Cost
 
Average
Balance
 
Interest
 
Average
Yield / Cost
 
 
(dollars in thousands)
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
12,318,289

 
$
141,885

 
4.73
%
 
$
7,895,325

 
$
113,387

 
5.92
%
CRE - non-owner-occupied
 
5,345,036

 
65,609

 
4.95

 
4,466,234

 
67,510

 
6.08

CRE - owner-occupied
 
2,273,660

 
27,517

 
4.97

 
2,253,334

 
29,931

 
5.43

Construction and land development
 
2,128,537

 
30,900

 
5.86

 
2,225,485

 
39,806

 
7.20

Residential real estate
 
2,329,384

 
22,970

 
3.97

 
1,511,773

 
18,794

 
4.99

Consumer
 
53,707

 
695

 
5.20

 
61,506

 
921

 
6.01

Loans held for sale
 
21,704

 
—

 
—

 
—

 
—

 
—

Total loans (1), (2), (3)
 
24,470,317

 
289,576

 
4.82

 
18,413,657

 
270,349

 
5.98

Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Securities - taxable
 
2,781,257

 
16,254

 
2.35

 
2,757,620

 
19,730

 
2.87

Securities - tax-exempt
 
1,403,324

 
12,000

 
4.34

 
979,534

 
9,170

 
4.66

Total securities (1)
 
4,184,581

 
28,254

 
3.02

 
3,737,154

 
28,900

 
3.34

Other
 
671,385

 
408

 
0.24

 
635,187

 
3,599

 
2.27

Total interest earning assets
 
29,326,283

 
318,238

 
4.46

 
22,785,998

 
302,848

 
5.44

Non-interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
161,960

 
 
 
 
 
166,691

 
 
 
 
Allowance for credit losses
 
(271,217
)
 
 
 
 
 
(156,456
)
 
 
 
 
Bank owned life insurance
 
186,648

 
 
 
 
 
171,460

 
 
 
 
Other assets
 
1,221,816

 
 
 
 
 
1,088,812

 
 
 
 
Total assets
 
$
30,625,490

 
 
 
 
 
$
24,056,505

 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
 
$
3,495,417

 
$
1,565

 
0.18
%
 
$
2,551,231

 
$
5,550

 
0.87
%
Savings and money market accounts
 
9,428,409

 
5,564

 
0.24

 
7,650,472

 
24,668

 
1.29

Certificates of deposit
 
2,150,477

 
7,876

 
1.47

 
2,271,075

 
11,670

 
2.06

Total interest-bearing deposits
 
15,074,303

 
15,005

 
0.40

 
12,472,778

 
41,888

 
1.35

Short-term borrowings
 
267,405

 
121

 
0.18

 
58,171

 
271

 
1.87

Qualifying debt
 
488,957

 
4,712

 
3.88

 
377,348

 
6,008

 
6.39

Total interest-bearing liabilities
 
15,830,665

 
19,838

 
0.50

 
12,908,297

 
48,167

 
1.50

Interest cost of funding earning assets
 
 
 
 
 
0.27

 
 
 
 
 
0.85

Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing demand deposits
 
11,130,035

 
 
 
 
 
7,869,266

 
 
 
 
Other liabilities
 
608,684

 
 
 
 
 
480,472

 
 
 
 
Stockholders’ equity
 
3,056,106

 
 
 
 
 
2,798,470

 
 
 
 
Total liabilities and stockholders' equity
 
$
30,625,490

 
 
 
 
 
$
24,056,505

 
 
 
 
Net interest income and margin (4)
 
 
 
$
298,400

 
4.19
%
 
 
 
$
254,681

 
4.59
%
(1)
Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $7.0 million and $6.2 million for the three months ended June 30, 2020 and 2019, respectively.
(2)
Included in the yield computation are net loan fees of $27.8 million and $12.2 million for the three months ended June 30, 2020 and 2019, respectively.
(3)
Includes non-accrual loans.
(4)
Net interest margin is computed by dividing net interest income by total average earning assets, annualized on an actual/actual basis.

79

 
 
Six Months Ended June 30,
 
 
2020
 
2019
 
 
Average
Balance
 
Interest
 
Average
Yield / Cost
 
Average
Balance
 
Interest
 
Average
Yield / Cost
 
 
(dollars in thousands)
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
10,984,718

 
$
266,537

 
4.99
%
 
$
7,718,003

 
$
222,476

 
5.98
%
CRE - non-owner occupied
 
5,291,513

 
134,522

 
5.12

 
4,339,366

 
129,951

 
6.05

CRE - owner occupied
 
2,277,479

 
56,708

 
5.11

 
2,290,210

 
60,015

 
5.39

Construction and land development
 
2,067,246

 
63,158

 
6.17

 
2,202,029

 
79,509

 
7.30

Residential real estate
 
2,243,781

 
43,764

 
3.92

 
1,451,774

 
35,362

 
4.91

Consumer
 
54,543

 
1,449

 
5.34

 
61,934

 
1,854

 
6.04

Loans held for sale
 
21,749

 
324

 
3.00

 
—

 
—

 
—

Total loans (1), (2), (3)
 
22,941,029

 
566,462

 
5.03

 
18,063,316

 
529,167

 
6.00

Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Securities - taxable
 
2,833,277

 
33,502

 
2.38

 
2,760,116

 
40,066

 
2.93

Securities - tax-exempt
 
1,285,770

 
22,119

 
4.36

 
937,790

 
17,968

 
4.81

Total securities (1)
 
4,119,047

 
55,621

 
3.00

 
3,697,906

 
58,034

 
3.40

Other
 
736,718

 
3,371

 
0.92

 
543,521

 
6,815

 
2.53

Total interest earning assets
 
27,796,794

 
625,454

 
4.62

 
22,304,743

 
594,016

 
5.48

Non-interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
179,012

 
 
 
 
 
164,441

 
 
 
 
Allowance for credit losses
 
(231,950
)
 
 
 
 
 
(155,359
)
 
 
 
 
Bank owned life insurance
 
180,511

 
 
 
 
 
170,973

 
 
 
 
Other assets
 
1,190,350

 
 
 
 
 
1,100,808

 
 
 
 
Total assets
 
$
29,114,717

 
 
 
 
 
$
23,585,606

 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
 
$
3,296,935

 
$
6,066

 
0.37
%
 
$
2,523,692

 
$
11,133

 
0.89
%
Savings and money market accounts
 
9,230,904

 
23,214

 
0.51

 
7,549,119

 
46,675

 
1.25

Certificates of deposit
 
2,248,260

 
18,241

 
1.63

 
2,045,683

 
19,868

 
1.96

Total interest-bearing deposits
 
14,776,099

 
47,521

 
0.65

 
12,118,494

 
77,676

 
1.29

Short-term borrowings
 
207,806

 
552

 
0.53

 
186,252

 
2,210

 
2.39

Qualifying debt
 
442,038

 
9,961

 
4.53

 
370,236

 
12,113

 
6.60

Total interest-bearing liabilities
 
15,425,943

 
58,034

 
0.76

 
12,674,982

 
91,999

 
1.46

Interest cost of funding earning assets
 
 
 
 
 
0.42

 
 
 
 
 
0.83

Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing demand deposits
 
9,999,863

 
 
 
 
 
7,713,291

 
 
 
 
Other liabilities
 
625,862

 
 
 
 
 
452,888

 
 
 
 
Stockholders’ equity
 
3,063,049

 
 
 
 
 
2,744,445

 
 
 
 
Total liabilities and stockholders' equity
 
$
29,114,717

 
 
 
 
 
$
23,585,606

 
 
 
 
Net interest income and margin (4)
 
 
 
$
567,420

 
4.20
%
 
 
 
$
502,017

 
4.65
%
(1)
Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $13.4 million and $12.3 million for the six months ended June 30, 2020 and 2019, respectively.
(2)
Included in the yield computation are net loan fees of $43.3 million and $24.5 million for the six months ended June 30, 2020 and 2019, respectively.
(3)
Includes non-accrual loans.
(4)
Net interest margin is computed by dividing net interest income by total average earning assets, annualized on an actual/actual basis.


80


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020 versus 2019
 
2020 versus 2019
 
 
Increase (Decrease) Due to Changes in (1)
 
Increase (Decrease) Due to Changes in (1)
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
 
(in thousands)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
50,945

 
$
(22,447
)
 
$
28,498

 
$
79,265

 
$
(35,204
)
 
$
44,061

CRE - non-owner occupied
 
10,787

 
(12,688
)
 
(1,901
)
 
24,206

 
(19,635
)
 
4,571

CRE - owner-occupied
 
246

 
(2,660
)
 
(2,414
)
 
(317
)
 
(2,990
)
 
(3,307
)
Construction and land development
 
(1,407
)
 
(7,499
)
 
(8,906
)
 
(4,118
)
 
(12,233
)
 
(16,351
)
Residential real estate
 
8,062

 
(3,886
)
 
4,176

 
15,448

 
(7,046
)
 
8,402

Consumer
 
(101
)
 
(125
)
 
(226
)
 
(196
)
 
(209
)
 
(405
)
Loans held for sale
 
—

 
—

 
—

 
324

 
—

 
324

Total loans
 
68,532

 
(49,305
)
 
19,227

 
114,612

 
(77,317
)
 
37,295

Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Securities - taxable
 
138

 
(3,614
)
 
(3,476
)
 
865

 
(7,429
)
 
(6,564
)
Securities - tax-exempt
 
3,624

 
(794
)
 
2,830

 
5,986

 
(1,835
)
 
4,151

Total securities
 
3,762

 
(4,408
)
 
(646
)
 
6,851

 
(9,264
)
 
(2,413
)
Other
 
22

 
(3,213
)
 
(3,191
)
 
884

 
(4,328
)
 
(3,444
)
Total interest income
 
72,316

 
(56,926
)
 
15,390

 
122,347

 
(90,909
)
 
31,438

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
 
$
423

 
$
(4,408
)
 
$
(3,985
)
 
$
1,423

 
$
(6,490
)
 
$
(5,067
)
Savings and money market
 
1,049

 
(20,153
)
 
(19,104
)
 
4,229

 
(27,690
)
 
(23,461
)
Certificates of deposit
 
(442
)
 
(3,352
)
 
(3,794
)
 
1,644

 
(3,271
)
 
(1,627
)
Short-term borrowings
 
95

 
(245
)
 
(150
)
 
57

 
(1,715
)
 
(1,658
)
Qualifying debt
 
1,076

 
(2,372
)
 
(1,296
)
 
1,618

 
(3,770
)
 
(2,152
)
Total interest expense
 
2,201

 
(30,530
)
 
(28,329
)
 
8,971

 
(42,936
)
 
(33,965
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net increase
 
$
70,115

 
$
(26,396
)
 
$
43,719

 
$
113,376

 
$
(47,973
)
 
$
65,403

 
(1)
Changes attributable to both volume and rate are designated as volume changes.
Comparison of interest income, interest expense and net interest margin
The Company's primary source of revenue is interest income. For the three months ended June 30, 2020, interest income was $318.2 million, an increase of $15.4 million, or 5.1%, compared to $302.8 million for the three months ended June 30, 2019. This increase was primarily the result of a $6.1 billion increase in the average loan balance, which drove a $19.2 million increase in loan interest income for the three months ended June 30, 2020. This increase was offset in part by a decrease in other interest income from federal funds sold of $3.2 million and a decrease in interest income from investment securities of $0.6 million for the comparable period due to a decrease in interest rates from June 30, 2019, which outweighed the increases in the related average asset balances.
For the six months ended June 30, 2020, interest income was $625.5 million, an increase of $31.4 million, or 5.3%, compared to $594.0 million for the six months ended June 30, 2019. This increase was primarily the result of a $4.9 billion increase in the average loan balance, which drove a $37.3 million increase in loan interest income for the six months ended June 30, 2020. This increase was offset in part by a decrease in other interest income from federal funds sold of $3.4 million and a decrease in interest income from investment securities of $2.4 million for the comparable period due to a decrease in interest rates from June 30, 2019, which outweighed the increases in the related average asset balances.

81

For the three months ended June 30, 2020, interest expense was $19.8 million, a decrease of $28.3 million, or 58.8%, compared to $48.2 million for the three months ended June 30, 2019. Interest expense on deposits decreased $26.9 million for the same period despite an increase in average interest-bearing deposits of $2.6 billion as repricing efforts in a lower rate environment drove a 95 basis point reduction in average cost of interest-bearing deposits.
For the six months ended June 30, 2020, interest expense was $58.0 million, a decrease of $34.0 million, or 36.9%, compared to $92.0 million for the six months ended June 30, 2019. Interest expense on deposits decreased $30.2 million for the same period despite an increase in average interest-bearing deposits of $2.7 billion as repricing efforts in a lower rate environment drove a 64 basis point reduction in average cost of interest-bearing deposits.
For the three months ended June 30, 2020, net interest income was $298.4 million, an increase of $43.7 million, or 17.2%, compared to $254.7 million for the three months ended June 30, 2019. The increase in net interest income reflects a $6.5 billion increase in average interest-earning assets, partially offset by an increase of $2.9 billion in average interest-bearing liabilities. The decrease in net interest margin of 40 basis points to 4.19% is the result of decreased yields on loans and investment securities, partially offset by lower deposit and funding costs for the three months ended June 30, 2020 compared to the same period in 2019.
For the six months ended June 30, 2020, net interest income was $567.4 million, an increase of $65.4 million, or 13.0%, compared to $502.0 million for the six months ended June 30, 2019. The increase in net interest income reflects a $5.5 billion increase in average interest-earning assets, partially offset by an increase of $2.8 billion in average interest-bearing liabilities. The decrease in net interest margin of 45 basis points to 4.20% is the result of decreased yields on loans and investment securities, partially offset by lower deposit and funding costs for the six months ended June 30, 2020 compared to the same period in 2019.
Provision for Credit Losses
The provision for credit losses in each period is reflected as a reduction in earnings for that period and, upon the adoption of CECL, includes amounts related to funded loans, unfunded loan commitments, and investment securities. The provision is equal to the amount required to maintain the allowance for credit losses at a level that is adequate to absorb estimated lifetime credit losses inherent in the loan and investment securities portfolios. For the three and six months ended June 30, 2020, the provision for credit losses was $92.0 million and $143.2 million, compared to $7.0 million and $11.5 million for the three and six months ended June 30, 2019, respectively. The significant increase in the provision for credit losses from the three and six months ended June 30, 2019 is primarily related to the current economic environment and estimating expected credit losses under the new CECL accounting standard. This standard changes the methodology for estimating credit losses on financial instruments from an incurred loss model to an expected total loss model. This results in the recognition of expected losses over the life of loans and HTM investment securities at the time that the loan is originated or the security is purchased, rather than after a loss has been incurred, which results in an acceleration in the timing of loss recognition. Further, as the Company's CECL models incorporate historical experience, current conditions, and reasonable and supportable forecasts in measuring expected credit losses, the worsening of economic assumptions due to the ongoing pandemic has also contributed to an increased provision for credit losses for the three and six months ended June 30, 2020.

82

Non-interest Income
The following table presents a summary of non-interest income for the periods presented: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
Increase (Decrease)
 
2020
 
2019
 
Increase (Decrease)
 
 
(in thousands)
Income from bank owned life insurance
 
$
6,670

 
$
978

 
$
5,692

 
$
7,632

 
$
1,959

 
$
5,673

Service charges and fees
 
5,130

 
5,821

 
(691
)
 
11,534

 
11,233

 
301

Income from equity investments
 
1,311

 
868

 
443

 
5,077

 
2,877

 
2,200

Card income
 
1,178

 
1,625

 
(447
)
 
2,895

 
3,466

 
(571
)
Foreign currency income
 
1,159

 
1,148

 
11

 
2,487

 
2,243

 
244

Lending related income and gains (losses) on sale of loans, net
 
719

 
553

 
166

 
1,367

 
804

 
563

Gain (loss) on sales of investment securities, net
 
158

 
—

 
158

 
230

 
—

 
230

Fair value gain (loss) adjustments on assets measured at fair value, net
 
4,432

 
1,572

 
2,860

 
(6,868
)
 
4,406

 
(11,274
)
Other income
 
513

 
1,653

 
(1,140
)
 
2,025

 
2,640

 
(615
)
Total non-interest income
 
$
21,270

 
$
14,218

 
$
7,052

 
$
26,379

 
$
29,628

 
$
(3,249
)
Total non-interest income for the three months ended June 30, 2020 compared to the same period in 2019 increased by $7.1 million. The increase in non-interest income is due primarily to an increase in income from bank owned life insurance of $5.7 million as the Company received a one-time enhancement fee of $5.6 million from surrender and replacement of certain policies, which was intended to offset an increase in tax expense related to the surrender. In addition, the net fair value gain adjustment on assets measured at fair value was $4.4 million for the three months ended June 30, 2020, compared to $1.6 million for the same period in 2019, which predominately relates to valuation increases on preferred stock holdings of other banking companies after a significant decline in value during the three months ended March 31, 2020. These increases were offset in part by a $1.1 million decrease in other non-interest income from the three months ended June 30, 2019 due to a decrease in rental income on equipment leases.
Total non-interest income for the six months ended June 30, 2020 compared to the same period in 2019 decreased by $3.2 million. The decrease in non-interest income is due primarily a net fair value loss adjustment of $6.9 million incurred during the six months ended June 30, 2020, which predominantly relates to valuation declines on preferred stock holdings of other banking companies. This decrease was offset in part by an increase in income from bank owned life insurance of $5.7 million primarily attributable to a one-time enhancement fee discussed above and an increase of $2.2 million in income from equity investments primarily related to an increase in income from SBIC investments.

83

Non-interest Expense
The following table presents a summary of non-interest expense for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
Increase (Decrease)
 
2020
 
2019
 
Increase (Decrease)
 
(in thousands)
Salaries and employee benefits
$
69,634

 
$
65,794

 
$
3,840

 
$
141,698

 
$
134,350

 
$
7,348

Legal, professional, and directors' fees
10,669

 
11,105

 
(436
)
 
21,071

 
18,637

 
2,434

Data processing
8,577

 
6,793

 
1,784

 
17,180

 
13,468

 
3,712

Occupancy
8,101

 
7,761

 
340

 
16,326

 
15,988

 
338

Deposit costs
3,514

 
7,669

 
(4,155
)
 
10,852

 
13,393

 
(2,541
)
Insurance
3,444

 
2,811

 
633

 
6,442

 
5,620

 
822

Loan and repossessed asset expenses
2,047

 
1,460

 
587

 
3,509

 
3,466

 
43

Marketing
869

 
1,057

 
(188
)
 
1,773

 
1,798

 
(25
)
Business development
831

 
1,444

 
(613
)
 
3,112

 
3,529

 
(417
)
Card expense
383

 
710

 
(327
)
 
1,126

 
1,344

 
(218
)
Intangible amortization
374

 
387

 
(13
)
 
747

 
774

 
(27
)
Net (gain) loss on sales / valuations of repossessed and other assets
(6
)
 
(620
)
 
614

 
(1,458
)
 
(523
)
 
(935
)
Other expense
6,362

 
7,878

 
(1,516
)
 
12,902

 
14,283

 
(1,381
)
Total non-interest expense
$
114,799

 
$
114,249

 
$
550

 
$
235,280

 
$
226,127

 
$
9,153

Total non-interest expense for the three months ended June 30, 2020 was relatively flat compared to the same period in 2019, which increased $0.6 million. This increase primarily relates to salaries and employee benefits and data processing, which have increased as the Company supports its continued growth. These increases were offset in part by a decrease in deposit costs of $4.2 million for the three months ended June 30, 2020 compared to the same period in 2019, primarily related to a decrease in deposit earnings credits paid to account holders in a lower rate environment.
Total non-interest expense for the six months ended June 30, 2020 compared to the same period in 2019 increased $9.2 million, or 4.0%. This increase primarily relates to salaries and employee benefits, data processing, and legal, professional and directors' fees, which have increased as the Company supports its continued growth. These increases were offset in part by a decrease in deposit costs of $2.5 million for the six months ended June 30, 2020 compared to the same period in 2019, primarily related to a decrease in deposit earnings credits paid to account holders in a lower rate environment.
Income Taxes
The Company's effective tax rate was 17.36% and 16.76% for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, the Company's effective tax rate was 17.70% and 17.10%, respectively. The increase in the effective tax rate from the three and six months ended June 30, 2019 is due primarily to tax expense associated with a surrender of bank owned life insurance and increased state tax accruals, partially offset by increases in forecasted tax-exempt income and investment tax credits in 2020.
Business Segment Results
The Company's reportable segments are aggregated primarily based on geographic location, services offered, and markets served. The Company's regional segments, which include Arizona, Nevada, Southern California, and Northern California, provide full service banking and related services to their respective markets. The Company's NBL segments, which include HOA Services, Public & Nonprofit Finance, Technology & Innovation, HFF, and Other NBLs, provide specialized banking services to niche markets. These NBLs are managed centrally and are broader in geographic scope than the Company's other segments, though still predominately located within the Company's core market areas. The Corporate & Other segment consists of corporate-related items, income and expense items not allocated to the Company's other reportable segments, and inter-segment eliminations.

84

The following tables present selected operating segment information for the periods presented:
 
 
 
 
Regional Segments
 
 
Consolidated Company
 
Arizona
 
Nevada
 
Southern California
 
Northern California
At June 30, 2020
 
(in millions)
Loans, net of deferred loan fees and costs
 
$
25,029.4

 
$
4,336.7

 
$
2,688.6

 
$
2,422.7

 
$
1,747.9

Deposits
 
27,544.6

 
7,628.7

 
4,645.7

 
3,023.8

 
2,726.1

 
 
 
 
 
 
 
 
 
 
 
At December 31, 2019
 
 
 
 
 
 
 
 
 
 
Loans, net of deferred loan fees and costs
 
$
21,123.3

 
$
3,847.9

 
$
2,252.5

 
$
2,253.9

 
$
1,311.2

Deposits
 
22,796.5

 
5,384.7

 
4,350.1

 
2,585.3

 
2,373.6

 
 
(in thousands)
Three Months Ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
Pre-tax income
 
$
112,871

 
$
34,910

 
$
25,405

 
$
8,142

 
$
14,350

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
Pre-tax income
 
$
215,343

 
$
71,558

 
$
52,586

 
$
23,042

 
$
24,663

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
Pre-tax income
 
$
147,686

 
$
37,290

 
$
28,403

 
$
17,429

 
$
13,761

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
Pre-tax income
 
$
294,018

 
$
71,627

 
$
53,760

 
$
33,591

 
$
26,242

 
 
National Business Lines
 
 
 
 
HOA
Services
 
Public & Nonprofit Finance
 
Technology & Innovation
 
Hotel Franchise Finance
 
Other NBLs
 
Corporate & Other
At June 30, 2020
 
(in millions)
Loans, net of deferred loan fees and costs
 
$
274.0

 
$
1,685.5

 
$
2,206.7

 
$
2,043.6

 
$
7,623.3

 
$
0.4

Deposits
 
3,675.1

 
0.1

 
4,416.5

 
—

 
67.2

 
1,361.4

 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of deferred loan fees and costs
 
$
237.2

 
$
1,635.6

 
$
1,552.0

 
$
1,930.8

 
$
6,098.7

 
$
3.5

Deposits
 
3,210.1

 
0.1

 
3,771.5

 
—

 
36.9

 
1,084.2

 
 
(in thousands)
Three Months Ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax income
 
$
16,162

 
$
(731
)
 
$
23,276

 
$
(8,396
)
 
$
44,530

 
$
(44,777
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2020
 
 
Pre-tax income
 
$
27,763

 
$
388

 
$
36,367

 
$
(3,183
)
 
$
61,391

 
$
(79,232
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax income
 
$
12,451

 
$
1,434

 
$
18,027

 
$
10,496

 
$
17,693

 
$
(9,298
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax income
 
$
24,755

 
$
2,991

 
$
39,822

 
$
20,243

 
$
31,728

 
$
(10,741
)

85

BALANCE SHEET ANALYSIS
Total assets increased $5.1 billion, or 19.0%, to $31.9 billion at June 30, 2020, compared to $26.8 billion at December 31, 2019. The increase in total assets relates primarily to organic loan growth. Loans increased $3.9 billion, or 18.5%, to $25.0 billion at June 30, 2020, compared to $21.1 billion at December 31, 2019. The increase in loans from December 31, 2019, which includes $1.7 billion in PPP loans, was driven by commercial and industrial loans of $3.4 billion, with smaller increases in residential real estate loans of $257.2 million, construction and land development loans of $245.4 million, and CRE, non-owner occupied loans of $98.6 million. These increases were partially offset by a decrease in CRE, owner occupied loans of $59.8 million.
Total liabilities increased $5.0 billion, or 21.0%, to $28.8 billion at June 30, 2020, compared to $23.8 billion at December 31, 2019. The increase in liabilities is due primarily to an increase in total deposits of $4.7 billion, or 20.8%, to $27.5 billion. The increase in deposits from December 31, 2019 was driven by increases of $3.7 billion in non-interest bearing demand deposits, $747.2 million in interest bearing demand deposits, and $702.5 million in savings and money market accounts, partially offset by a decrease of $399.7 million in certificates of deposit. In addition, qualifying debt increased by $224.2 million due to issuance of $225.0 million of subordinated debt, recorded net of issue costs, during the three months ended June 30, 2020.
Total stockholders’ equity increased by $85.7 million, or 2.8%, to $3.1 billion at June 30, 2020 from December 31, 2019. The increase in stockholders' equity is primarily a function of net income, partially offset by share repurchases and dividends to shareholders as well as the adoption impact of CECL.
Investment securities
Debt securities are classified at the time of acquisition as either HTM, AFS, or trading based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. HTM securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts. AFS securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Investment securities classified as AFS are carried at fair value. Unrealized gains or losses on AFS debt securities are recorded as part of AOCI in stockholders’ equity, net of tax. Amortization of premiums or accretion of discounts on MBS is periodically adjusted for estimated prepayments. Trading securities are reported at fair value, with unrealized gains and losses included in current period earnings.
The Company's investment securities portfolio is utilized as collateral for borrowings, required collateral for public deposits and customer repurchase agreements, and to manage liquidity, capital, and interest rate risk.
The following table summarizes the carrying value of the investment securities portfolio for each of the periods below: 
 
 
June 30, 2020
 
December 31, 2019
 
 
(in thousands)
Debt securities
 
 
 
 
CDO
 
$
7,302

 
$
10,142

Commercial MBS issued by GSEs
 
100,410

 
94,253

Corporate debt securities
 
93,210

 
99,961

Municipal securities
 
9,924

 
7,773

Private label residential MBS
 
1,015,786

 
1,129,227

Residential MBS issued by GSEs
 
1,340,457

 
1,412,060

Tax-exempt
 
1,406,324

 
1,039,962

Trust preferred securities
 
22,889

 
27,040

U.S. government sponsored agency securities
 
—

 
10,000

U.S. treasury securities
 
—

 
999

Total debt securities
 
$
3,996,302

 
$
3,831,417

 
 
 
 
 
Equity securities
 
 
 
 
CRA investments
 
$
56,431

 
$
52,504

Preferred stock
 
81,978

 
86,197

Total equity securities
 
$
138,409

 
$
138,701


86

Loans
The table below summarizes the distribution of the Company’s held for investment loan portfolio: 
 
 
June 30, 2020
 
 
(in thousands)
Commercial and industrial
 


Tech & Innovation
 
$
2,123,722

Other commercial and industrial
 
6,247,269

CRE - owner occupied
 
2,011,321

CRE - non-owner occupied
 


Hotel Franchise Finance
 
1,876,980

Other CRE - non-owned occupied
 
3,434,860

Residential
 
2,349,359

Construction and land development
 
2,168,310

Warehouse lending
 
2,898,736

Municipal & nonprofit
 
1,685,481

Other
 
213,177

Total loans HFI
 
25,009,215

Allowance for credit losses
 
(310,550
)
Total loans HFI, net of allowance
 
$
24,698,665

 
 
December 31, 2019
 
(in thousands)
Commercial and industrial
 
$
9,382,043

Commercial real estate - non-owner occupied
 
5,245,634

Commercial real estate - owner occupied
 
2,316,913

Construction and land development
 
1,952,156

Residential real estate
 
2,147,664

Consumer
 
57,083

Loans, net of deferred loan fees and costs
 
21,101,493

Allowance for credit losses
 
(167,797
)
Total loans HFI
 
$
20,933,696

Loans that are held for investment are stated at the amount of unpaid principal, adjusted for net deferred fees and costs, premiums and discounts, purchase accounting fair value adjustments, and an allowance for credit losses. Net deferred loan fees of $80.6 million and $47.7 million reduced the carrying value of loans as of June 30, 2020 and December 31, 2019, respectively. Net unamortized purchase premiums on secondary market loan purchases of $29.7 million and $29.9 million increased the carrying value of loans as of June 30, 2020 and December 31, 2019, respectively.
As of June 30, 2020 and December 31, 2019, the Company also had $20.2 million and $21.8 million of HFS loans, respectively.
Concentrations of Lending Activities
The Company monitors concentrations within four broad categories: geography, industry, product, and collateral. The Company’s loan portfolio includes significant credit exposure to the CRE market. As of each of the periods ended June 30, 2020 and December 31, 2019, CRE related loans accounted for approximately 39% and 45% of total loans, respectively. Substantially all of these loans are secured by first liens with an initial loan to value ratio of generally not more than 75%. Approximately 30% and 31% of these CRE loans, excluding construction and land loans, were owner-occupied at June 30, 2020 and December 31, 2019, respectively.

87

Non-performing Assets
Total non-performing loans increased by $77.3 million, or 91.6%, at June 30, 2020 to $161.6 million from $84.3 million at December 31, 2019.
 
 
June 30, 2020
 
December 31, 2019
 
 
(dollars in thousands)
Total nonaccrual loans (1)
 
$
139,721

 
$
55,968

Loans past due 90 days or more on accrual status
 
—

 
—

Accruing troubled debt restructured loans
 
21,859

 
28,356

Total nonperforming loans
 
$
161,580

 
$
84,324

Other assets acquired through foreclosure, net
 
$
9,424

 
$
13,850

Nonaccrual HFI and HFS loans to funded HFI loans
 
0.56
%
 
0.27
%
Nonaccrual HFI loans to funded HFI loans
 
0.48
%
 
0.27
%
Loans past due 90 days or more on accrual status to funded HFI loans
 
—

 
—

(1)
Includes non-accrual TDR loans of $14.9 million and $10.6 million at June 30, 2020 and December 31, 2019, respectively, and non-accrual HFS loans of $20.2 million and zero at June 30, 2020 and December 31, 2019, respectively.
Interest income that would have been recorded under the original terms of non-accrual loans was $1.7 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $2.4 million and $0.8 million for the six months ended June 30, 2020 and 2019, respectively.
The composition of nonaccrual HFI loans by loan type and by segment were as follows: 
 
 
June 30, 2020
 
 
Nonaccrual
Balance
 
Percent of Nonaccrual Balance
 
Percent of
Total HFI Loans
 
 
(dollars in thousands)
Commercial and industrial
 


 


 


Tech & Innovation
 
$
48,968

 
40.98
%
 
0.19
%
Other commercial and industrial
 
11,877

 
9.94

 
0.05

CRE - owner occupied
 
23,185

 
19.40

 
0.09

CRE - non-owner occupied
 


 


 


Hotel Franchise Finance
 
—

 
—

 
—

Other CRE - non-owned occupied
 
28,791

 
24.09

 
0.12

Residential
 
4,439

 
3.71

 
0.02

Construction and land development
 
—

 
—

 
—

Warehouse lending
 
—

 
—

 
—

Municipal & nonprofit
 
2,017

 
1.69

 
0.01

Other
 
231

 
0.19

 
—

Total non-accrual loans
 
$
119,508

 
100.00
%
 
0.48
%
 
 
December 31, 2019
 
 
Nonaccrual
Balance
 
Percent of Nonaccrual Balance
 
Percent of
Total HFI Loans
 
(dollars in thousands)
Commercial and industrial
 
$
24,501

 
43.77
%
 
0.12
%
Commercial real estate
 
23,720

 
42.38

 
0.11

Construction and land development
 
2,147

 
3.84

 
0.01

Residential real estate
 
5,600

 
10.01

 
0.03

Consumer
 
—

 
—

 
—

Total non-accrual loans
 
$
55,968

 
100.00
%
 
0.27
%

88

 
 
June 30, 2020
 
December 31, 2019
 
 
Nonaccrual Loans
 
Percent of Segment's Total HFI Loans
 
Nonaccrual Loans
 
Percent of Segment's Total
HFI Loans
 
 
(dollars in thousands)
Arizona
 
$
28,801

 
0.66
%
 
$
29,062

 
0.76
%
Nevada
 
4,065

 
0.15

 
8,001

 
0.36

Southern California
 
9,564

 
0.39

 
1,759

 
0.08

Northern California
 
22,510

 
1.29

 
5,193

 
0.40

HOA Services
 
74

 
0.03

 
—

 
—

Public & Nonprofit Finance
 
2,017

 
0.12

 
2,147

 
0.13

Technology and Innovation
 
48,968

 
2.22

 
5,867

 
0.38

Other NBLs
 
3,509

 
0.05

 
3,939

 
0.06

Total non-accrual loans
 
$
119,508

 
0.48
%
 
$
55,968

 
0.27
%
Troubled Debt Restructured Loans
A TDR loan is a loan on which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in the accrued interest, or deferral of interest payments. The majority of the Company's modifications are extensions in terms or deferral of payments which result in no lost principal or interest followed by reductions in interest rates or accrued interest. Consistent with regulatory guidance, a TDR loan that is subsequently modified in another restructuring agreement but has shown sustained performance and classification as a TDR, will be removed from TDR status provided that the modified terms were market-based at the time of modification.
Allowance for Credit Losses
The following table summarizes the activity in the Company's allowance for credit losses for the period indicated: 
 
 
Three Months Ended June 30, 2020
 
 
Balance,
March 31, 2020 (1)
 
Provision
Expense
(Reversal)
 
Writeoffs
 
Recoveries
 
Balance,
June 30, 2020
(1)
 
 
(in thousands)
Commercial and industrial
 

 

 

 

 

Tech & Innovation
 
$
39,756

 
$
17,553

 
$
2,750

 
$
—

 
$
54,559

Other commercial and industrial
 
120,374

 
(9,079
)
 
1,881

 
(516
)
 
109,930

CRE - owner occupied
 
10,557

 
5,070

 
43

 
(3
)
 
15,587

CRE - non-owner occupied
 

 

 

 

 

Hotel Franchise Finance
 
18,828

 
17,036

 
—

 
—

 
35,864

Other CRE - non-owned occupied
 
14,134

 
19,788

 
885

 
365

 
32,672

Residential
 
1,279

 
428

 
—

 
(18
)
 
1,725

Construction and land development
 
7,155

 
28,630

 
—

 
(7
)
 
35,792

Warehouse lending
 
402

 
341

 
—

 
—

 
743

Municipal & nonprofit
 
16,166

 
962

 
—

 
—

 
17,128

Other
 
6,678

 
(44
)
 
164

 
(80
)
 
6,550

Total
 
$
235,329

 
$
80,685

 
$
5,723

 
$
(259
)
 
$
310,550

Net charge-offs to average loans outstanding
0.09
%
Allowance for credit losses to funded HFI loans
1.24

(1)
Includes an estimate of future recoveries.

89

 
 
Six Months Ended June 30, 2020
 
 
Balance,
January 1, 2020 (1)
 
Provision
Expense
(Reversal)
 
Writeoffs
 
Recoveries
 
Balance,
June 30, 2020
(1)
 
 
(in thousands)
Commercial and industrial
 

 

 

 

 

Tech & Innovation
 
$
22,394

 
$
34,915

 
$
2,750

 
$
—

 
$
54,559

Other commercial and industrial
 
95,784

 
14,274

 
1,936

 
1,808

 
109,930

CRE - owner occupied
 
10,420

 
5,203

 
43

 
7

 
15,587

CRE - non-owner occupied
 

 

 

 

 

Hotel Franchise Finance
 
14,104

 
21,760

 
—

 
—

 
35,864

Other CRE - non-owned occupied
 
10,503

 
21,488

 
885

 
1,566

 
32,672

Residential
 
3,814

 
(2,119
)
 
—

 
30

 
1,725

Construction and land development
 
6,218

 
29,557

 
—

 
17

 
35,792

Warehouse lending
 
246

 
497

 
—

 
—

 
743

Municipal & nonprofit
 
17,397

 
(269
)
 
—

 
—

 
17,128

Other
 
6,045

 
620

 
206

 
91

 
6,550

Total
 
$
186,925

 
$
125,926

 
$
5,820

 
$
3,519

 
$
310,550

Net charge-offs to average loans outstanding
0.02
%
(1)
Includes an estimate of future recoveries.
 
 
Three Months Ended June 30, 2019
 
 
Balance,
March 31, 2019
 
Charge-offs
 
Recoveries
 
Provision Expense (Reversal)
 
Balance,
June 30, 2019
 
 
(in thousands)
Construction and land development
 
$
26,083

 
$
141

 
$
(9
)
 
$
140

 
$
26,091

Commercial real estate
 
37,867

 
—

 
(439
)
 
2,952

 
41,258

Residential real estate
 
13,006

 
397

 
(27
)
 
(30
)
 
12,606

Commercial and industrial
 
77,254

 
2,018

 
(495
)
 
3,904

 
79,635

Consumer
 
777

 
—

 
(8
)
 
34

 
819

Total
 
$
154,987


$
2,556

 
$
(978
)
 
$
7,000

 
$
160,409

Net charge-offs to average loans outstanding
0.03
%
Allowance for credit losses to funded HFI loans
0.89

 
 
Six Months Ended June 30, 2019
 
 
Balance,
December 31, 2018
 
Charge-offs
 
Recoveries
 
Provision Expense (Reversal)
 
Balance,
June 30, 2019
 
 
(in thousands)
Construction and land development
 
$
22,513

 
$
141

 
$
(64
)
 
$
3,655

 
$
26,091

Commercial real estate
 
34,829

 
—

 
(892
)
 
5,537

 
41,258

Residential real estate
 
11,276

 
585

 
(120
)
 
1,795

 
12,606

Commercial and industrial
 
83,118

 
4,142

 
(972
)
 
(313
)
 
79,635

Consumer
 
981

 
1

 
(13
)
 
(174
)
 
819

Total
 
$
152,717

 
$
4,869

 
$
(2,061
)
 
$
10,500

 
$
160,409

Net charge-offs to average loans outstanding
0.03
%

90

The following table summarizes the allocation of the allowance for credit losses by loan type.
 
 
June 30, 2020
 
 
Allowance for credit losses
 
Percent of total allowance for credit losses
 
Percent of loan type to total HFI loans
 
 
(dollars in thousands)
Commercial and industrial
 


 


 


Tech & Innovation
 
$
54,559

 
17.6
%
 
8.5
%
Other commercial and industrial
 
109,930

 
35.5

 
25.0

CRE - owner occupied
 
15,587

 
5.0

 
8.0

CRE - non-owner occupied
 


 


 


Hotel Franchise Finance
 
35,864

 
11.5

 
7.5

Other CRE - non-owned occupied
 
32,672

 
10.5

 
13.7

Residential
 
1,725

 
0.6

 
9.4

Construction and land development
 
35,792

 
11.5

 
8.7

Warehouse lending
 
743

 
0.2

 
11.6

Municipal & nonprofit
 
17,128

 
5.5

 
6.7

Other
 
6,550

 
2.1

 
0.9

Total
 
$
310,550

 
100.0
%
 
100.0
%
 
 
December 31, 2019
 
 
Allowance for credit losses
 
Percent of total allowance for credit losses
 
Percent of loan type to total HFI loans
 
 
(dollars in thousands)
Commercial and industrial
 
$
82,302

 
49.0
%
 
44.5
%
Commercial Real Estate
 
47,273

 
28.2

 
35.8

Construction and Land Development
 
23,894

 
14.2

 
9.2

Residential Real Estate
 
13,714

 
8.2

 
10.2

Consumer
 
614

 
0.4

 
0.3

Total
 
$
167,797

 
100.0
%
 
100.0
%
Problem Loans
The Company classifies loans consistent with federal banking regulations using a nine category grading system. These loan grades are described in further detail in "Item 1. Business” of the Company's Annual Report for the year ended December 31, 2019. The following table presents information regarding potential and actual problem loans, consisting of loans graded Special Mention, Substandard, Doubtful, and Loss, but still performing: 

91

 
 
June 30, 2020
 
 
Number of Loans
 
Loan Balance
 
Percent of Loan Balance
 
Percent of Total HFI Loans
 
 
(dollars in thousands)
Commercial and industrial
 


 


 


 


Tech & Innovation
 
34

 
$
27,006

 
7.39
%
 
0.11
%
Other commercial and industrial
 
77

 
113,661

 
31.10

 
0.45

CRE - owner occupied
 
27

 
33,099

 
9.06

 
0.13

CRE - non-owner occupied
 


 


 


 


Hotel Franchise Finance
 
9

 
116,694

 
31.94

 
0.47

Other CRE - non-owned occupied
 
11

 
44,837

 
12.27

 
0.18

Residential
 
2

 
752

 
0.21

 
0.00

Construction and land development
 
6

 
19,759

 
5.41

 
0.08

Warehouse lending
 
—

 
—

 
—

 
—

Municipal & nonprofit
 
3

 
6,659

 
1.82

 
0.03

Other
 
17

 
2,941

 
0.80

 
0.01

Total
 
186

 
$
365,408

 
100.00
%
 
1.46
%
 
 
 
December 31, 2019
 
 
Number of Loans
 
Loan Balance
 
Percent of Loan Balance
 
Percent of Total
HFI Loans
 
 
(dollars in thousands)
Commercial and industrial
 
73

 
$
96,464

 
43.06
%
 
0.46
%
Commercial real estate
 
37

 
107,839

 
48.14

 
0.51

Construction and land development
 
10

 
18,971

 
8.47

 
0.09

Residential real estate
 
3

 
727

 
0.33

 
0.00

Consumer
 
1

 
10

 
0.00

 
0.00

Total
 
124

 
$
224,011

 
100.00
%
 
1.06
%
Goodwill and Other Intangible Assets
Goodwill represents the excess consideration paid for net assets acquired in a business combination over their fair value. Goodwill and other intangible assets acquired in a business combination that are determined to have an indefinite useful life are not subject to amortization, but are subsequently evaluated for impairment at least annually. The Company has goodwill and intangible assets totaling $296.9 million at June 30, 2020, which have been allocated to the Nevada, Northern California, Technology & Innovation, and HFF operating segments.
The Company performs its annual goodwill and intangibles impairment tests as of October 1 each year, or more often if events or circumstances indicate that the carrying value may not be recoverable. During the three and six months ended June 30, 2020 and 2019, there were no events or circumstances that indicated an interim impairment test of goodwill or other intangible assets was necessary.
Deferred Tax Assets
As of June 30, 2020, the net deferred tax asset was $34.1 million, an increase of $16.0 million from December 31, 2019. This overall increase in the net deferred tax asset was primarily the result of an increase in the allowance for credit losses under the new CECL accounting guidance, which upon adoption on January 1, 2020, increased the deferred tax asset by $8.7 million.
At June 30, 2020 and December 31, 2019, the Company had no deferred tax valuation allowance.
Deposits
Deposits are the primary source for funding the Company's asset growth. Total deposits increased to $27.5 billion at June 30, 2020, from $22.8 billion at December 31, 2019, an increase of $4.7 billion, or 20.8%. The increase in deposits is attributable to an increase across most deposit types, with the largest increases in non-interest bearing demand deposits of $3.7 billion, interest bearing demand deposits of $747.2 million, and $702.5 million in savings and money market accounts, partially offset by a decrease of $399.7 million in certificates of deposit.

92

WAB is a participant in the Promontory Interfinancial Network, a network that offers deposit placement services such as CDARS and ICS, which offer products that qualify large deposits for FDIC insurance. At each of the periods ended June 30, 2020 and December 31, 2019, the Company also has $1.1 billion of wholesale brokered deposits. In addition, deposits for which the Company provides account holders with earnings credits and referral fees totaled $5.3 billion and $3.1 billion at June 30, 2020 and December 31, 2019, respectively. The Company incurred $3.1 million and $7.4 million in deposit related costs during the three months ended June 30, 2020 and 2019, respectively. The Company incurred $10.2 million and $12.9 million in deposit related costs during the six months ended June 30, 2020 and 2019, respectively.
The average balances and weighted average rates paid on deposits are presented below:
 
 
Three Months Ended June 30,
 
 
2020
 
2019
 
 
Average Balance
 
Rate
 
Average Balance
 
Rate
 
 
(dollars in thousands)
Interest-bearing transaction accounts
 
$
3,495,417

 
0.18
%
 
$
2,551,231

 
0.87
%
Savings and money market accounts
 
9,428,409

 
0.24

 
7,650,472

 
1.29

Certificates of deposit
 
2,150,477

 
1.47

 
2,271,075

 
2.06

Total interest-bearing deposits
 
15,074,303

 
0.40

 
12,472,778

 
1.35

Non-interest-bearing demand deposits
 
11,130,035

 
—

 
7,869,266

 
—

Total deposits
 
$
26,204,338

 
0.23
%
 
$
20,342,044

 
0.83
%
 
 
Six Months Ended June 30,
 
 
2020
 
2019
 
 
Average Balance
 
Rate
 
Average Balance
 
Rate
 
 
(dollars in thousands)
Interest-bearing transaction accounts
 
$
3,296,935

 
0.37
%
 
$
2,523,692

 
0.89
%
Savings and money market accounts
 
9,230,904

 
0.51

 
7,549,119

 
1.25

Certificates of deposit
 
2,248,260

 
1.63

 
2,045,683

 
1.96

Total interest-bearing deposits
 
14,776,099

 
0.65

 
12,118,494

 
1.29

Non-interest-bearing demand deposits
 
9,999,863

 
—

 
7,713,291

 
—

Total deposits
 
$
24,775,962

 
0.39
%
 
$
19,831,785

 
0.79
%
Other Borrowings
The Company from time to time utilizes short-term borrowed funds to support short-term liquidity needs generally created by increased loan demand. The majority of these short-term borrowed funds consist of advances from the FHLB and customer repurchase agreements. The Company’s borrowing capacity with the FHLB is determined based on collateral pledged, generally consisting of securities and loans. In addition, the Company has borrowing capacity from other sources, collateralized by securities, including securities sold under agreements to repurchase, which are reflected at the amount of cash received in connection with the transaction, and may require additional collateral based on the fair value of the underlying securities. At June 30, 2020, total short-term borrowed funds consist of FHLB advances of $10.0 million and customer repurchase agreements of $25.4 million. At December 31, 2019, total short-term borrowed funds consisted of customer repurchase agreements of $16.7 million.
Qualifying Debt
Qualifying debt consists of subordinated debt and junior subordinated debt, inclusive of issuance costs and fair market value adjustments. At June 30, 2020, the carrying value of qualifying debt was $617.7 million, compared to $393.6 million at December 31, 2019. The increase in qualifying debt from December 31, 2019 is due to issuance of $225.0 million of subordinated debt, recorded net of issue costs, during the three months ended June 30, 2020.

93

Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could have a direct material effect on the Company’s business and financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items (discussed in "Note 11. Commitments and Contingencies" to the Unaudited Consolidated Financial Statements) as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In March 2020, the federal bank regulatory authorities issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The Company has elected the five-year CECL transition option in connection with its adoption of CECL on January 1, 2020. As a result, capital ratios and amounts as of June 30, 2020 exclude the impact of the increased allowance for credit losses related to the adoption of ASC 326.
As of June 30, 2020 and December 31, 2019, the Company and the Bank exceeded the capital levels necessary to be classified as well-capitalized, as defined by the banking agencies. The actual capital amounts and ratios for the Company and the Bank are presented in the following tables as of the periods indicated:
 
 
Total Capital
 
Tier 1 Capital
 
Risk-Weighted Assets
 
Tangible Average Assets
 
Total Capital Ratio
 
Tier 1 Capital Ratio
 
Tier 1 Leverage Ratio
 
Common Equity
Tier 1
 
 
(dollars in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WAL
 
$
3,664,914

 
$
2,875,218

 
$
27,404,507

 
$
30,343,007

 
13.4
%
 
10.5
%
 
9.5
%
 
10.2
%
WAB
 
3,457,403

 
2,800,435

 
27,436,340

 
30,372,912

 
12.6

 
10.2

 
9.2

 
10.2

Well-capitalized ratios
 
 
 
 
 
 
 
 
 
10.0

 
8.0

 
5.0

 
6.5

Minimum capital ratios
 
 
 
 
 
 
 
 
 
8.0

 
6.0

 
4.0

 
4.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WAL
 
$
3,257,874

 
$
2,775,390

 
$
25,390,142

 
$
26,110,275

 
12.8
%
 
10.9
%
 
10.6
%
 
10.6
%
WAB
 
3,030,301

 
2,703,549

 
25,452,261

 
26,134,431

 
11.9

 
10.6

 
10.3

 
10.6

Well-capitalized ratios
 
 
 
 
 
 
 
 
 
10.0

 
8.0

 
5.0

 
6.5

Minimum capital ratios
 
 
 
 
 
 
 
 
 
8.0

 
6.0

 
4.0

 
4.5




94

Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. The critical accounting policies upon which the Company's financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and all amendments thereto, as filed with the SEC.

During the first quarter of 2020, the Company adopted the ASUs related to credit losses, which include ASU 2016-13, Measurement of Credit Losses on Financial Instruments, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments - Credit Losses, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The new standards significantly change the impairment model for most financial assets that are measured at amortized cost, including off-balance sheet credit exposures, from an incurred loss model to an expected loss model. The amendments in ASU 2016-13 require that an organization measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance for credit losses and credit loss expense in those future periods. The allowance level is influenced by loan volumes, loan asset quality ratings, delinquency status, historical credit loss experience, loan performance characteristics, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. Changes to the assumptions in the model in future periods could have a material impact on the Company's Consolidated Financial Statements. See "Note 1. Summary of Significant Accounting Policies" for a detailed discussion of the Company's methodologies for estimating expected credit losses.
There were no other material changes to the critical accounting policies disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Liquidity
Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in the Company's business operations or unanticipated events, including the ongoing COVID-19 pandemic.
The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors, and regulators. The Company's liquidity, represented by cash and amounts due from banks, federal funds sold, and non-pledged marketable securities, is a result of the Company's operating, investing, and financing activities and related cash flows. In order to ensure funds are available when necessary, on at least a quarterly basis, the Company projects the amount of funds that will be required over a twelve-month period and it also strives to maintain relationships with a diversified customer base. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets.
While the Company does not anticipate any need for additional liquidity, in response to the uncertainty regarding the severity and duration of the COVID-19 pandemic, the Company has taken several actions to ensure the strength of its liquidity position. These actions include establishing a $1.8 billion Federal Reserve lending facility in connection with funding loans to small and medium-sized businesses and suspending stock repurchases from April 17, 2020 through the end of the second quarter 2020. In addition, the Company is also in a position to pledge additional collateral to increase its borrowing capacity with the FRB, if necessary.
The following table presents the available and outstanding balances on the Company's lines of credit:
 
 
June 30, 2020
 
 
Available
Balance
 
Outstanding Balance
 
 
(in millions)
Unsecured fed funds credit lines at correspondent banks
 
$
2,281.0

 
$
—


95

In addition to lines of credit, the Company has borrowing capacity with the FHLB and FRB from pledged loans and securities. The borrowing capacity, outstanding borrowings, and available credit as of June 30, 2020 are presented in the following table:
 
 
June 30, 2020
 
 
(in millions)
FHLB:
 
 
Borrowing capacity
 
$
4,417.9

Outstanding borrowings
 
10.0

Letters of credit
 
21.0

Total available credit
 
$
4,386.9

 
 
 
FRB:
 
 
Borrowing capacity
 
$
2,289.4

Outstanding borrowings
 
—

Total available credit
 
$
2,289.4

The Company has a formal liquidity policy and, in the opinion of management, its liquid assets are considered adequate to meet cash flow needs for loan funding and deposit cash withdrawals for the next 90-120 days. At June 30, 2020, there was $4.1 billion in liquid assets, comprised of $1.5 billion in cash and cash equivalents and $2.6 billion in unpledged marketable securities. At December 31, 2019, the Company maintained $2.9 billion in liquid assets, comprised of $434.6 million of cash and cash equivalents and $2.5 billion of unpledged marketable securities.
The Parent maintains liquidity that would be sufficient to fund its operations and certain non-bank affiliate operations for an extended period should funding from normal sources be disrupted. Since deposits are taken by WAB and not by the Parent, Parent liquidity is not dependent on the Bank's deposit balances. In the Company's analysis of Parent liquidity, it is assumed that the Parent is unable to generate funds from additional debt or equity issuances, receives no dividend income from subsidiaries and does not pay dividends to stockholders, while continuing to make non-discretionary payments needed to maintain operations and repayment of contractual principal and interest payments owed by the Parent and affiliated companies. Under this scenario, the amount of time the Parent and its non-bank subsidiary can operate and meet all obligations before the current liquid assets are exhausted is considered as part of the Parent liquidity analysis. Management believes the Parent maintains adequate liquidity capacity to operate without additional funding from new sources for over twelve months.
WAB maintains sufficient funding capacity to address large increases in funding requirements, such as deposit outflows. This capacity is comprised of liquidity derived from a reduction in asset levels and various secured funding sources. On a long-term basis, the Company’s liquidity will be met by changing the relative distribution of its asset portfolios (for example, by reducing investment or loan volumes, or selling or encumbering assets). Further, the Company can increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from correspondent banks, the FHLB of San Francisco, and the FRB. At June 30, 2020, the Company's long-term liquidity needs primarily relate to funds required to support loan originations, commitments, and deposit withdrawals, which can be met by cash flows from investment payments and maturities, and investment sales, if necessary.
The Company’s liquidity is comprised of three primary classifications: 1) cash flows provided by operating activities; 2) cash flows used in investing activities; and 3) cash flows provided by financing activities. Net cash provided by or used in operating activities consists primarily of net income, adjusted for changes in certain other asset and liability accounts and certain non-cash income and expense items, such as the provision for credit losses, investment and other amortization and depreciation. For the six months ended June 30, 2020 and 2019, net cash provided by operating activities was $283.4 million and $330.3 million, respectively.
The Company's primary investing activities are the origination of real estate and commercial loans, the collection of repayments of these loans, and the purchase and sale of securities. The Company's net cash provided by and used in investing activities has been primarily influenced by its loan and securities activities. The net increase in loans for the six months ended June 30, 2020 and 2019 was $3.8 billion and $1.5 billion, respectively. There was a net decrease in investment securities for the six months ended June 30, 2020 and 2019 of $164.8 million and $69.9 million, respectively.
Net cash provided by financing activities has been impacted significantly by increased deposit levels. During the six months ended June 30, 2020 and 2019, net deposits increased $4.7 billion and $2.3 billion, respectively.
Fluctuations in core deposit levels may increase the Company's need for liquidity as certificates of deposit mature or are withdrawn before maturity, and as non-maturity deposits, such as checking and savings account balances, are withdrawn. Additionally, the Company is exposed to the risk that customers with large deposit balances will withdraw all or a portion of such deposits, due in

96

part to the FDIC limitations on the amount of insurance coverage provided to depositors. To mitigate the uninsured deposit risk, the Company participates in the CDARS and ICS programs, which allow an individual customer to invest up to $50.0 million and $150.0 million, respectively, through one participating financial institution or, a combined total of $200.0 million per individual customer, with the entire amount being covered by FDIC insurance. As of June 30, 2020, the Company has $445.3 million of CDARS and $902.2 million of ICS deposits.
As of June 30, 2020, the Company has $1.1 billion of wholesale brokered deposits outstanding. Brokered deposits are generally considered to be deposits that have been received from a third party who is engaged in the business of placing deposits on behalf of others. A traditional deposit broker will direct deposits to the banking institution offering the highest interest rate available. Federal banking laws and regulations place restrictions on depository institutions regarding brokered deposits because of the general concern that these deposits are not relationship based and are at a greater risk of being withdrawn and placed on deposit at another institution offering a higher interest rate, thus posing liquidity risk for institutions that gather brokered deposits in significant amounts.
Federal and state banking regulations place certain restrictions on dividends paid. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the bank. Dividends paid by WAB to the Parent would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. During the three and six months ended June 30, 2020, WAB paid dividends to the Parent of $35.0 million and $130.0 million, respectively. Subsequent to June 30, 2020, WAB paid dividends to the Parent of $15.0 million.
Recent accounting pronouncements
See "Note 1. Summary of Significant Accounting Policies," of the Notes to Unaudited Consolidated Financial Statements contained in Item 1. Financial Statements for information on recent and recently adopted accounting pronouncements and their expected impact, if any, on the Company's Consolidated Financial Statements.

97

Supervision and Regulation
The following information is intended to update, and should be read in conjunction with, the information contained under the caption “Supervision and Regulation” in the Company’s Annual Report on Form 10-K and the supplemental disclosure related thereto contained under the same caption in the Company’s Form 10-Q for the quarter ended March 31, 2020.
CARES Act
On March 27, 2020, the CARES Act was passed by Congress and signed into law by the President. The CARES Act provided approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of U.S. financial institutions like the Company and the Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve, and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including new bills comparable in scope to the CARES Act, prior to the end of 2020.
Set forth below is a brief overview of select provisions of the CARES Act and other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the operations and activities of the Company and its subsidiaries, including the Bank. The following description is qualified in its entirety by reference to the full text of the CARES Act and the statutes, regulations, and policies described herein. Future legislation and/or amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the Company. Such legislation and related regulations and supervisory guidance will be implemented over time and will remain subject to review by Congress and the implementing regulations issued by federal regulatory authorities. The Company continues to assess the impact of the CARES Act, the potential impact of new COVID-19 legislation, and other statutes, regulations, and supervisory guidance related to the COVID-19 pandemic.
Paycheck Protection Program. The CARES Act amended the SBA’s loan program, in which the Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. On June 5, 2020, the President signed the PPPFA into law, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of the COVID-19 pandemic, the President signed additional legislation authorizing the SBA to resume accepting PPP applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020. It is anticipated that additional revisions to the SBA’s interim final rules on forgiveness and loan review procedures will be forthcoming to address these and related changes. As a participating lender in the PPP, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto.
Troubled Debt Restructuring and Loan Modifications for Affected Borrowers. The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration, and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so.
Federal Reserve Programs and Other Recent Initiatives
Main Street Lending Program. The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities. On April 9, 2020, the Federal Reserve proposed the creation of the MSLP to implement certain of these recommendations. On June 15, 2020, the Federal Reserve Bank of Boston opened the MSLP for lender registration. The MSLP supports lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The MSLP operates through three facilities: the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. The Federal Reserve is currently working to refine the MSLP’s operational infrastructure and facilities and is expected to release further rules and operational guidance. The Bank has registered as a lender under the MSLP and continues to monitor developments related thereto.

98

Temporary Regulatory Capital Relief related to Impact of CECL. Concurrent with enactment of the CARES Act, the federal bank regulatory authorities issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The Company has elected this capital relief option.
Supervisory Developments. On June 25, 2020, the Federal Reserve announced that it would take several actions to ensure large banks remain resilient despite the ongoing economic impact of COVID-19. Specifically, in the third quarter, the Federal Reserve will require large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Company and the Bank continue to monitor these developments to assess what effect (if any) they will have, but do not anticipate any material impact at this time.
Modification of the Volcker Rule. Also on June 25, 2020, the Federal Reserve - along with the Commodity Futures Trading Commission, FDIC, the Office of the Comptroller of the Currency, and the SEC - issued a final rule modifying the Volcker Rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds (“covered funds”). The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring or having certain relationships with a hedge fund or private equity fund. The final rule modifies three areas of the Volcker Rule by: (1) streamlining the covered funds portion of the rule; (2) addressing the extraterritorial treatment of certain foreign funds; and (3) permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was intended to address. The new rule becomes effective October 1, 2020. The Company and the Bank are currently reviewing this new rule to determine what effect (if any) it will have, but do not anticipate any material impact at this time.

99

Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's market risk arises primarily from interest rate risk inherent in its lending, investing, and deposit taking activities. To that end, management actively monitors and manages the Company's interest rate risk exposure. The Company generally manages its interest rate sensitivity by evaluating re-pricing opportunities on its earning assets to those on its funding liabilities.
Management uses various asset/liability strategies to manage the re-pricing characteristics of the Company's assets and liabilities, all of which are designed to ensure that exposure to interest rate fluctuations is limited to within the Company's guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits and management of the deployment of its securities, are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.
Interest rate risk is addressed by ALCO, which includes members of executive management, finance, and operations. ALCO monitors interest rate risk by analyzing the potential impact on the net EVE and net interest income from potential changes in interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The Company manages its balance sheet in part to maintain the potential impact on EVE and net interest income within acceptable ranges despite changes in interest rates.
The Company's exposure to interest rate risk is reviewed at least quarterly by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine its change in both EVE and net interest income in the event of hypothetical changes in interest rates. If potential changes to EVE and net interest income resulting from hypothetical interest rate changes are not within the limits established by the BOD, the BOD may direct management to adjust the asset and liability mix to bring interest rate risk within Board-approved limits.
Net Interest Income Simulation. In order to measure interest rate risk at June 30, 2020, the Company used a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between a baseline net interest income forecast using current yield curves that do not take into consideration any future anticipated rate hikes, compared to forecasted net income resulting from an immediate parallel shift in rates upward or downward, along with other scenarios directed by ALCO. The income simulation model includes various assumptions regarding re-pricing relationships for each of the Company's products. Many of the Company's assets are floating rate loans, which are assumed to re-price immediately and, proportional to the change in market rates, depending on their contracted index, including the impact of caps or floors. Some loans and investments contain contractual prepayment features (embedded options) and, accordingly, the simulation model incorporates prepayment assumptions. The Company's non-term deposit products re-price concurrently with interest rate changes taken by the Federal Open Market Committee.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet remains static and that its structure does not change over the course of the year. It does not account for all factors that could impact the Company's results, including changes by management to mitigate interest rate changes or secondary factors, such as changes to the Company's credit risk profile as interest rates change.
Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment speeds that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the modeled assumptions may have significant effects on the Company's actual net interest income.

100

This simulation model assesses the changes in net interest income that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates. At June 30, 2020, our net interest income exposure for the next twelve months related to these hypothetical changes in market interest rates was within our current guidelines.
Sensitivity of Net Interest Income
 
 
Parallel Shift Rate Scenario
(change in basis points from Base)
 
 
Down 100
 
Base
 
Up 100
 
Up 200
 
 
(in thousands)
Interest Income
 
$
1,228,390

 
$
1,258,824

 
$
1,376,399

 
$
1,527,351

Interest Expense
 
54,113

 
82,954

 
151,330

 
219,731

Net Interest Income
 
$
1,174,277

 
$
1,175,870

 
$
1,225,069

 
$
1,307,620

% Change
 
(0.1
)%
 
 
 
4.2
%
 
11.2
%
 
 
Interest Rate Ramp Scenario
(change in basis points from Base)
 
 
Down 100
 
Base
 
Up 100
 
Up 200
 
 
(in thousands)
Interest Income
 
$
1,233,805

 
$
1,258,824

 
$
1,312,155

 
$
1,373,010

Interest Expense
 
63,869

 
82,954

 
97,899

 
112,103

Net Interest Income
 
$
1,169,936

 
$
1,175,870

 
$
1,214,256

 
$
1,260,907

% Change
 
(0.5
)%
 
 
 
3.3
%
 
7.2
%
Economic Value of Equity. The Company measures the impact of market interest rate changes on the NPV of estimated cash flows from its assets, liabilities, and off-balance sheet items, defined as EVE, using a simulation model. This simulation model assesses the changes in the market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates.
At June 30, 2020, the Company's EVE exposure related to these hypothetical changes in market interest rates was within the Company's current guidelines. The following table shows the Company's projected change in EVE for this set of rate shocks at June 30, 2020:
Economic Value of Equity 
 
 
Interest Rate Scenario (change in basis points from Base)
 
 
Down 100
 
Base
 
Up 100
 
Up 200
 
Up 300
 
Up 400
 
 
(in thousands)
Assets
 
$
32,677,344

 
$
32,209,242

 
$
31,659,918

 
$
31,125,516

 
$
30,648,118

 
$
30,170,235

Liabilities
 
28,403,562

 
27,436,628

 
26,565,282

 
25,715,655

 
24,877,839

 
24,126,895

Net Present Value
 
$
4,273,782

 
$
4,772,614

 
$
5,094,636

 
$
5,409,861

 
$
5,770,279

 
$
6,043,340

% Change
 
(10.5
)%
 
 
 
6.7
%
 
13.4
%
 
20.9
%
 
26.6
%
The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, asset prepayments, and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates. Actual amounts may differ from the projections set forth above should market conditions vary from the underlying assumptions.

101

Derivative Contracts. In the normal course of business, the Company uses derivative instruments to meet the needs of its customers and manage exposure to fluctuations in interest rates. The following table summarizes the aggregate notional amounts, market values, and terms of the Company’s derivative positions as of June 30, 2020 and December 31, 2019:
Outstanding Derivatives Positions
June 30, 2020
 
December 31, 2019
Notional
 
Net Value
 
Weighted Average Term (Years)
 
Notional
 
Net Value
 
Weighted Average Term (Years)
(dollars in thousands)
$
884,829

 
$
(95,318
)
 
15.4

 
$
872,595

 
$
(53,667
)
 
16.1


102

Item 4.
Controls and Procedures.
Evaluation of Disclosure Controls
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the CEO and CFO have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Additionally, the Company's disclosure controls and procedures were also effective in ensuring that information required to be disclosed by the Company in the reports it files or is subject to under the Exchange Act is accumulated and communicated to the Company's management, including the CEO and CFO, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting during the quarter ended June 30, 2020, which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings.
There are no material pending legal proceedings to which the Company is a party or to which any of its properties are subject. There are no material proceedings known to the Company to be contemplated by any governmental authority. From time to time, the Company is involved in a variety of litigation matters in the ordinary course of its business and anticipates that it will become involved in new litigation matters in the future.

103

Item 1A.
Risk Factors.
Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 includes a discussion of the material risks and uncertainties that could adversely affect our business and impact our results of operations or financial condition. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in the Annual Report on Form 10-K.
The COVID-19 pandemic and resulting adverse economic conditions have adversely impacted our business and results and could have a more material adverse impact on our business, financial condition and results of operations.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the United States and international economies and financial markets. The spread of COVID-19 in the United States has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Many states, including Arizona, where we are headquartered, and California and Nevada, in which we have significant operations, declared states of emergency. These states, like many others, subsequently moved to a phased reopening, but continue to be significantly impacted by the pandemic.
Although the Bank has continued operating, the COVID-19 pandemic has caused disruptions to our business and could cause material disruptions to our business and operations in the future. Impacts to our business have included the transition of a significant portion of our workforce to home locations, increases in costs due to additional health and safety precautions implemented at our branches, and an increase in draws on unfunded loan commitments and requests for forbearance and loan modifications. To the extent that commercial and social restrictions remain in place or increase, our expenses, delinquencies, foreclosures and credit losses may materially increase. In addition, the unprecedented nature of COVID-19 related disruptions heighten the inherent uncertainty of forecasting future economic conditions and their impact on our loan portfolio, and therefore increases the risk that the assumptions, judgments and estimates used to determine the appropriate allowance for future credit losses may prove to be incorrect, resulting in actual credit losses that exceed the Company’s recorded allowance.
Unfavorable economic conditions also may make it more difficult for us to maintain deposit levels and loan origination volume and to obtain additional financing. Furthermore, such conditions have and may continue to adversely impact accounting estimates that we use to determine our allowance and provision for credit losses. Such conditions also could impact the value of assets we carry on our balance sheet such as goodwill, and cause the value of collateral associated with our existing loans to decline. Further, certain debt and equity instruments may experience significant fluctuations in value due to market disruption, widening of credit spreads, and governmental purchase intervention. 
In addition, in March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, in part as a result of the pandemic. Sudden or unexpectedly large changes in interest rates could impact our ability to effectively manage our interest rate risk and could result in maturity imbalances in our assets and liabilities. A prolonged period of very low interest rates or an increase in interest rates that affects our borrowers' ability to repay loans could reduce our net interest income and have a material adverse impact on our cash flows.
While we have taken and are continuing to take actions to protect the safety and well-being of our employees and customers, no assurance can be given that the steps being taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption which will occur to our employee's ability to perform their jobs or provide customer support and service. The continued or renewed spread of COVID-19 could negatively impact the availability of key personnel necessary to conduct our business, the business and operations of our third-party service providers who perform critical services for our business, or the businesses of many of our customers and borrowers. A sizable percentage of our workforce has returned to working in our office buildings, and it is possible that one or more members of our senior management or other key employees contracts the virus and is unable to perform their essential duties. At the same time, many of our employees and employees of companies we do business with continue to work remotely as a result of the pandemic, and the risk of cyber-attacks, breaches or similar events, whether through our systems or those of third parties on which we rely, therefore has increased.
Among the factors outside our control that are likely to affect the impact the COVID-19 pandemic will ultimately have on our business are:
•
the pandemic’s course and severity;
•
the direct and indirect results of the pandemic, such as recessionary economic trends, including with respect to employment, wages and benefits, commercial activity, consumer spending and real estate market values;
•
political, legal and regulatory actions and policies in response to the pandemic, including the effects of restrictions on commerce and banking, such as moratoria and other suspensions of collections, foreclosures, and related obligations;

104

•
the timing, magnitude and effect of public spending, directly or through subsidies, its direct and indirect effects on commercial activity and incentives of employers and individuals to resume or increase employment, wages and benefits and commercial activity;
•
the timing and availability of direct and indirect governmental support for various financial assets, including mortgage loans;
•
the potential long-term impact on the tourism and hospitality industries, which could affect our hotel franchise finance business and portfolio;
•
the long-term effect of the economic downturn on our intangible assets such as our deferred tax asset and goodwill;
•
potential longer-term effects of increased government spending on the interest rate environment and borrowing costs for non-governmental parties;
•
the ability of our employees and our third-party vendors to work effectively during the course of the pandemic;
•
potential longer-term shifts toward mobile banking, telecommuting and telecommerce; and
•
geographic variation in the severity and duration of the COVID-19 pandemic, including in states in which we operate physically such as Arizona, California and Nevada;
The ongoing COVID-19 pandemic has resulted in severe volatility in the financial markets and meaningfully lower stock prices for many companies, including our common stock. Depending on the extent and duration of the COVID-19 pandemic, the price of our common stock may continue to experience volatility and declines.
The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the requirements and operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their policies and procedures for accepting and processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on a PPP loan if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced. In such a case, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any related loss from the Company.
We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the pandemic continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows, as well as our regulatory capital and liquidity ratios, could be materially adversely affected.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table provides information about the Company's purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act for the periods indicated:
 
 
Total Number of Shares Purchased (1)(2)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
April 2020
 
300,273

 
$
30.78

 
297,000

 
178,392,414

May 2020
 
—

 
—

 
—

 
178,392,414

June 2020
 
7,782

 
37.87

 
—

 
178,392,414

Total
 
308,055

 
$
30.96

 
297,000

 
178,392,414

(1)
Shares purchased during the period outside of the publicly announced repurchase program were transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock awards during the period.
(2)
The Company's common stock repurchase program was renewed through December 2020, authorizing the Company to repurchase up to $250.0 million of its outstanding common stock. Due to the COVID-19 pandemic, effective as of April 17, 2020, the Company has temporarily suspended its stock repurchases through the end of the second quarter 2020.
Item 5.
Other Information

105

Not applicable.

106

Item 6.
Exhibits
EXHIBITS
3.1
 
Amended and Restated Certificate of Incorporation, effective as of May 19, 2015 (incorporated by reference to Exhibit 3.1 of Western Alliance's Form 10-K filed with the SEC on March 1, 2019.
 
 
 
3.2
 
Amended and Restated Bylaws of Western Alliance, effective as of May 19, 2015 (incorporated by reference to Exhibit 3.2 of Western Alliance's Form 8-K filed with the SEC on May 22, 2015).
 
 
 
3.3
 
Articles of Conversion, as filed with the Nevada Secretary of State on May 29, 2014 (incorporated by reference to Exhibit 3.1 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).
 
 
 
3.4
 
Certificate of Conversion, as filed with the Delaware Secretary of State on May 29, 2014 (incorporated by reference to Exhibit 3.2 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).
 
 
 
4.1
 
Form of 5.25% Fixed-to-Floating Rate Subordinated Notes due June 1, 2030 (incorporated by reference to Exhibit 4.1 of Western Alliance's Form 8-K filed with the SEC on May 22, 2020).
 
 
 
10.1
 
Western Alliance Bancorporation 2005 Stock Incentive Plan (as amended and restated effective April 15, 2020) (incorporated by reference to Exhibit 10.1 of Western Alliance's Form 8-K filed with the SEC on June 1, 2020).
 
 
 
31.1*
 
CEO Certification Pursuant Rule 13a-14(a)/15d-14(a).
 
 
 
31.2*
 
CFO Certification Pursuant Rule 13a-14(a)/15d-14(a).
 
 
 
32**
 
CEO and CFO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
 
 
 
101.SCH*
 
Inline XBRL Taxonomy Extension Schema Document.
 
 
 
101.DEF*
 
Inline XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.CAL*
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB*
 
Inline XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE*
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
104
 
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*    Filed herewith.
**
Furnished herewith.
±
Management contract or compensatory arrangement.


107

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
WESTERN ALLIANCE BANCORPORATION
 
 
 
 
 
July 31, 2020
 
By:
 
/s/ Kenneth A. Vecchione
 
 
 
 
Kenneth A. Vecchione
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
July 31, 2020
 
By:
 
/s/ Dale Gibbons
 
 
 
 
Dale Gibbons
 
 
 
 
Vice Chairman and Chief Financial Officer
 
 
 
 
 
July 31, 2020
 
By:
 
/s/ J. Kelly Ardrey Jr.
 
 
 
 
J. Kelly Ardrey Jr.
 
 
 
 
Chief Accounting Officer



108

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